How it does it is a bit more nuanced, but on a basic level, the Federal Reserve controls the interest rates that directly impact you as a saver and investor.
Right now, signals from the broader economy are pushing the Fed toward raising rates in an effort to tamp down inflation that remains a bit elevated from targeted levels. The historically low interest rates that existed prior to the hikes instituted over the past 16 months or so resulted in big changes in the financial landscape.
What's a saver and/or investor to do in response?
Subtle shifts to consider
Historically speaking, the interest rates we operate under today aren't actually all that high. When compared to the 1980s and 1990s, they'd have been considered quite reasonable. It is only when you compare the rates right now to the rates of the recent past, which hovered near zero for years, that you see just how drastically things have changed.
Image source: Getty Images.
For example, when bank accounts and certificates of deposit (CDs) were yielding less than 1%, you might have found a 3% dividend yield highly attractive from a risk/reward standpoint. Now, with safe yields closer to 5%, these investment options are not as appealing. On a simplistic level, savers can adjust to higher rates by shifting to safe, higher-yielding cash options, like a high-yield bank account, a CD, or a money market fund. If you can't find a stock you really want to buy, sitting in cash isn't nearly as disappointing as it once was.
Bigger moves this opens up
Higher rates materially change the equation when it comes to investing in companies. For example, higher rates make it more costly for companies to justify capital investment projects since debt will be more costly to manage. It makes properties more expensive to finance for real estate investment trusts (REITs). And it can cause material havoc for companies that have relied on short-term or variable-rate debt since their interest expenses will rise quickly.
For investors, it might make a lot of sense to put their money toward companies with lower levels of leverage. Simply put, companies with little to no debt just don't have to worry as much about rising rates as companies with heavy debt loads. As an example, retailer VF Corp. (VFC 0.16%) estimates that fiscal 2024 earnings will see a $0.30 per share headwind from rising rates, which, among other problems, should lead to adjusted earnings falling between $2.05 and $2.25 per share. Adjusted earnings in fiscal 2022 totaled $2.10 per share, so that outlook isn't exactly great. Meanwhile, industrial parts supplier Fastenal (FAST 0.04%) has long focused on maintaining a rock-solid balance sheet, and the only material headwind it needs to consider is a business slowdown. And even that would likely be easy to muddle through, given the fact that it has little to no leverage.
FAST Financial Debt to Equity (Quarterly) data by YCharts
That said, some stocks could actually benefit from higher rates -- for example, REITs that provide capital to companies via sale/leaseback transactions, like W.P. Carey (WPC -1.70%). In the near term, rising rates can make life more difficult because market prices for properties tend to adjust more slowly than rates. That has put downward pressure on REITs and W.P. Carey stock in particular, which is down around 18% from its 52-week high.
But as potential sale/leaseback partners have more trouble getting financing from banks and it costs more to raise debt capital, selling a property becomes increasingly attractive. W.P. Carey is particularly well positioned on this front because its portfolio spans the industrial, warehouse, office, retail, and self-storage sectors. That gives it a number of different levers to pull when companies start to look for other financing options. It isn't the only sale/leaseback-focused REIT that will likely benefit once the initial impact of rising rates works through the system.
We've dealt with all this before
Overall, however, there's nothing particularly new about the interest rates in place today. This isn't really a new normal; it's more like a return to normal. And that means you'll want to be more thoughtful with where you put your cash (you should always be thoughtful about that), you should make sure that whatever investments you make compete well on a risk/reward basis with cash (again, a good plan at all times), and focus on financially strong companies when you do invest (another solid long-term approach).
However, if you are looking to be opportunistic, you might want to examine companies, like W.P. Carey, that might benefit from higher rates. But that's only if you want to be particularly active in your investment approach -- just sticking to good companies with strong balance sheets is probably enough to ensure long-term investment success no matter where interest rates are heading.
