Market timing can be challenging at any point in time but there are some logical moves traders and investors can make to invest in the best stocks and sectors in a rising interest rate environment.
When interest rates are at or near historical lows, a wise investment move is to prepare for rising interest rates, followed by a final move upward for stocks before a decline (bear market) ensues. Although the economy may be moderately healthy when rates begin rising, this environment is the beginning of the end of an economic cycle. Therefore a tactical and balanced approach is to stay invested to take advantage of late-stage positive momentum but prepare for harder times that are lurking around the corner.
Best Stock Funds for Rising Interest Rates
This is a site for mutual fund investors; therefore I won't provide tips for specific stocks to buy in rising interest rate environments but I will tell you which mutual fund categories can work for you. One such category is growth stock funds. The best time to invest in growth stocks is typically when times are good during the latter (mature) stages of an economic cycle. Look no further than 2007 as an example: The economy was growing rapidly and most market indexes had reached all-time highs. It is also important to note that it was the year prior to 'The Great Recession' of 2008. In 2007, growth stocks dominated across all capitalization--large-cap stocks, mid-cap stocks and small-cap stocks (See my chart in Value vs Growth vs Index article). Times of rapid growth often coincide with rising interest rates and the momentum investing strategy captures this idea.
Best Stock Sectors for Rising Interest Rates
Again, when interest rates are on the rise, the economy is typically nearing a peak (the Federal Reserve raises rates when the economy appears to be growing too quickly and thus inflation is a concern). Those who aim to time the market with sectors will have the goal of capturing positive returns on the upside while preparing to protect against harder declines when the market turns down (again, think 2007 to 2008).
Therefore traders and investors may consider sectors that tend to perform best (fall in price the least) when the market and economy head downward:
- Consumer Staples (Non-cyclicals): People still need to buy their groceries and buy products for daily living when recession begins to hit.
- Health Care: Similar to staples, consumers still need to buy their medicine and go to the doctor in both good times and bad.
- Gold: When traders and investors anticipate an economic slowdown, they tend to move into funds, such as gold funds and ETFs that invest in reliable asset types.
As always, I provide my caution that market timing is not a good idea for the vast majority of investors. However, you can still incorporate some of these ideas into your portfolio construction for purposes of diversification.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.