Last week marked not only the end of the second quarter, but also the end of the Federal Reserve’s second round of financial stimulus, known as QE2.
Quantitative easing version 2.0 was the Fed’s second attempt to lower long-term interest rates by buying Treasuries on the open market in the hope of spurring lending activity. It will take months to determine if these actions prove fruitful for the economy, but investors are not patient people. They want answers now! So rather than wonder whether QE2 was a success, let’s take a closer look at a few areas that stand to benefit from the end of QE2.
Consider these:
- Financials: I know this doesn’t make a lot of sense on the surface. Banks make much of their profits from lending, and if lending rates rise, the number of consumers and businesses looking to borrow will likely drop. But consider just how much extra cash banks and insurers have lying around on their balance sheets following our most prolonged recession in seven decades, and you’ll see why higher interest rates could mean big gains in the form of higher net interest income. Insurers Wellpoint (NYSE: WLP) and Humana (NYSE: HUM) recently initiated quarterly dividends, while banking giant JPMorgan Chase (NYSE: JPM) recently raised its dividend. All three companies stand to benefit greatly by rising interest rates and so might their dividends.
- Precious metals: It’s never really a bad idea to consider diversifying your portfolio with precious metals in any investing environment. Gold in particular serves as an inflationary hedge and a store of value, making it an ideal candidate for most portfolios. One company, in particular, that comes to mind is Newmont Mining (NYSE: NEM), since it recently tied its quarterly dividend to the price of gold, giving investors the opportunity to cash in with the company if gold prices continue to soar. If the economy sours following QE2, gold could be a prudent fallback investment.
- Consumer goods/necessities: Another way to protect your portfolio from weakness is by investing in consumer necessities. By necessities I mean all those things we buy regardless of price -- food, electricity, and even toilet paper. Companies that provide necessity products can be decent hedges in the face of economic uncertainty. This means steady cash flow and likely rock-solid profits for a grocer like Whole Foods Market (NYSE: WFM), an electrical utility like Duke Energy (NYSE: DUK), or a personal products company like Procter & Gamble (NYSE: PG).
While I can’t say for certain whether QE2 will be a resounding success or a miserable failure, history has shown that long-term interest rates are unlikely to stay at these record levels forever. For that reason, it pays to be prudent and consider your options for investing in a rising interest rate environment now, instead of waiting until it’s too late.
How would you fortify your portfolio against rising long-term interest rates? Share your ideas in the comments section below and consider reading up on our 13 steps to investing Foolishly to see if you’re doing everything you can to maximize your investing potential.
