I know, rising interest rates is scary.
Everywhere, financial gurus are telling me this is one of the most uncertain periods in market history. Besides that, you’ve the war in Ukraine and rising inflation.
The Federal Reserve is also looking to raise interest rates to 2.5% by year end.
So what do interest rates mean for stocks?
Here’s what I truly think:
Rising rates is good for banks. Because banks charge higher for loans. Businesses pay more interest on their debt. Bad for stocks. But good for bank stocks.
Especially, rising rates mean heavily indebted tech companies pay more interest. Bad for tech stocks.
Rising rates means bond prices go down. Bad for bonds. Good for stocks.
Rising rates increase mortgage lending costs. People spend less. Economy slows. Bad for stocks.
Rising rates mean people expect higher inflation. Bad for stocks.
But higher inflation means economy is growing. Higher revenues for businesses. Good for stocks.
High inflation also means rental rates go up. Good for REITs.
But borrowing costs go up. Bad for REITs.
Rising rates mean good for companies who hold a lot of cash. Good for stocks.
And rising rates mean at some point, the Federal Reserve will cut back on interest rates again. Good for stocks.
Well, here’s the thing, who really knows how interest rates affect stocks?
My best guess is — you don’t have to worry about rising interest rates. It’s hard to control exogenous events. No one knows what’s going to happen.
What I learn from some of the greatest investors is investing doesn’t mean you’ve to keep watching the news, monitor what everyone else says.
Investing simply means focusing on what you can control — picking great businesses. Accumulate as many as possible. Sit on my hands. Do nothing. Crucially, it’s trying to make good, uninterrupted returns for the longest period of time, without peeking at the news everyday.
That’s how wealth compounds.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
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