How Should You Invest in a Rising-Rate Environment?

The Federal Reserve has raised short-term interest rates eight times since 2015, but long-term interest rates haven't really kept pace. However, it looks like that may be changing. In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss:

• Why the stock market has dropped recently.
• Which industries do well in rising-rate environments.
• Which industries tend to do poorly.
• How rising rates should factor into your strategy.

A full transcript follows the video.

This video was recorded on Oct. 8, 2018.

Jason Moser: Let's just go ahead and get rolling right here. As always, joining me today is certified financial planner, Matt Frankel. Matt, it was a good week for both of our squads on Saturday. Your Gamecocks, tell me a little bit about that real quick. Who'd they beat?

Matt Frankel: We beat Missouri, and it was on a last-second field goal. It was a really exciting game to watch.

Moser: Yeah, and there were a few delays there with the weather, too.

Frankel: Yeah, we had a thunder stormy day, which was kind of welcome, given all the heat we've been having.

Moser: It was nice to see, too, that my Wofford Terriers stuck it to Chattanooga. It ought to be a good week here for us. Let's go ahead and open this up. We're going to talk about the market last week, and it's bleeding into this week, it looks like. The S&P 500 last week posted its worst week in nearly a month. Gasp! Now, that really isn't the main story here. Anyone who knows us knows we don't invest based on what happened over the course of last month. But I think it leads to a more interesting discussion, based on what we talk about here on the Financials show. A lot of the blame was assigned to the rates forecast. We were talking last week about short-term interest rates vs. long-term interest rates. It sounds like with these short-term rates on the rise here, it also sounds like long-term rates are perhaps starting to catch up a little bit here. I think this is throwing a little bit of concern, perhaps, into the stock market here.

Matt, when you see news like this, rates news as it pertains to the stock market in general, how do you invest in times like these? Perhaps it's a little bit more of an uncertain time. I would argue it's still certain, from the angle that rates really don't have anywhere to go but up. Does this change your investing philosophy at all?

Frankel: Well, not really over the long-term. But in the short-term, this does tend to affect different stocks in different ways. To name a couple of examples, we talk about banking, obviously, this is the Financials show. Banks, as I mentioned last week, tend to do better when longer-term interest rates start to rise. This affects the rates they get on things like, say, mortgages and auto loans. The spread between what they're bringing in on these long-term loans and paying out for deposits tends to get wider when long-term rates spike like they are right now, if you can really call 3.2 on the 10 year spike. Banks tend to see their profits rise, so you might see bank stocks outperform if this trend continues.

On the other hand, high dividend stocks, like REITs, defensive sectors like utilities, tend to get hurt because their yields tend to look not as good in comparison to what investors could get from risk-free products like the 10-year and 30-year Treasuries. So, you'll see these stocks get under pressure and underperform in the short-term, as investors will start selling them, get out of those, in favor of lower-risk investments like long-term bonds that are now paying better.

You'll see banks go up in price if the trend continues. You'll see the higher yield stocks go down in price. That creates some great buying opportunities in my opinion. I have a lot of high dividend stocks on my own radar. In the long run, it doesn't affect things. But in the short-term, it could definitely create some good opportunities.