Investors don’t like uncertainty and instability, especially when it comes to the financial sector. And that’s perhaps why stocks have had a choppy ride after the recent bank failures.
But a prominent economist sees a silver lining amid the crisis.
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“If this banking accident occurred later, we would have much higher rates,” Jeremy Siegel, professor of finance at the Wharton School of Business, says in his latest weekly commentary. “So, a natural downshift in how tight policy will become from this is one of silver linings from this current banking crisis.”
While the stock market continues to be volatile, the professor sees better days ahead.
“The recent turmoil in markets also makes me more optimistic on the outlook for 2024.”
That said, the Fed may not be done with its rate hikes.
“Torsten Slok, Chief Economist at Apollo, wrote on Saturday that his team estimated that tighter financial conditions over the last week could translate to a 1.5% increase in the Fed Funds Rate—or 6 more 25 basis point hikes!” Siegel writes.
Investors don’t like prolonged rate hikes. But not all assets are created equal. Some — like the three listed below — might be able to perform well even if rates continue to rise.
Real estate
It may seem counterintuitive to have real estate on this list. When the Fed raises its benchmark interest rates, mortgage rates tend to go up as well, so shouldn’t that be bad for the real estate market?
While it’s true that mortgage payments have been on the rise, real estate has actually demonstrated its resilience in times of rising interest rates according to investment management company Invesco.
“Between 1978 and 2021 there were 10 distinct years where the Federal Funds rate increased,” Invesco says. “Within these 10 identified years, US private real estate outperformed equities and bonds seven times and US public real estate outperformed six times.”
It also helps that real estate is a well-known hedge against inflation.
Why? Because as the price of raw materials and labor goes up, new properties are more expensive to build. And that drives up the price of existing real estate.
Well-chosen properties can provide more than just price appreciation. Investors also get to earn a steady stream of rental income.
But you don’t need to be a landlord to start investing in real estate. There are plenty of real estate investment trusts (REITs) as well as crowdfunding platforms that can get you started on becoming a real estate mogul.
Read more: Here’s how much money the average middle-class American household makes — how do you stack up?
Banks
Most businesses fear rising interest rates. But for certain financials, like banks, higher rates are a good thing.
Banks lend money at higher rates than they borrow, pocketing the difference. When interest rates increase, the spread of how much a bank earns typically widens.
In Siegel’s commentary, he points out that “when interest rates were zero, banks still found a way to make money.”
Banking giants have also been returning money to shareholders.
Last July, Bank of America boosted its quarterly dividend by 5% to 22 cents per share. Last June, Morgan Stanley announced an 11% increase to its quarterly payout to $0.775 per share — and that’s after it doubled its quarterly dividend to $0.70 per share a year earlier.
Investors can also get exposure to the group through ETFs like the SPDR S&P Bank ETF (KBE) and the Invesco KBW Bank ETF (KBWB).
Consumer staples
Higher interest rates can cool down the economy when it’s running too hot. But the economy is not running too hot, and many fear that more rate hikes could lead to a recession.
That’s why investors may want to check out recession-proof sectors — like consumer staples.
Consumer staples are essential products such as food and drinks, household goods, and hygiene products.
We need these things regardless of how the economy is doing or what the federal funds rates are.
Even if a recession hits the U.S. economy, we’ll probably still see Quaker Oats and Tropicana orange juice — made by PepsiCo (PEP) — on families’ breakfast tables. Meanwhile, Tide and Bounty — well-known brands from Procter & Gamble (PG) — will likely remain on shopping lists across the nation.
You can gain access to the group through ETFs like the Consumer Staples Select Sector SPDR Fund (XLP) and the Vanguard Consumer Staples ETF (VDC).
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
