What Happens If Interest Rates Rise – A TextBook Refresher

My friend Steve Strazza had a great primer on what might happen if interest rates rise. The gist:

We finally got a major resolution in what we consider one of the most important charts in the world these days.

I’m talking about the US 10-year yield reclaiming that critical 1.40% level this week. And this begs the question as to what a rising rate environment might mean for investor portfolios.

Well, one thing we know for sure is we want to stay away from bonds… unless we’re shorting them.

But how do we want to position ourselves in the stock market if yields are breaking out? It’s simple, really.

Some stocks do better with rising/higher rates, while others thrive in markets characterized by low growth and low yields. If this is the beginning of a fresh move higher for yields, then we want to be focused on buying the stocks that are likely to benefit the most.

It all goes back to the global growth, reflation, and reopening trade these days. It’s cyclical and value stocks. Those are the groups that should outperform.

Meanwhile, growth and tech stocks–and any long-duration assets, for that matter–could come under pressure, as they become relatively less attractive during periods where more economically sensitive areas are offering more appealing growth prospects.

Steve concludes with:

So, what are some of these implications?

Maybe these upside resolutions in yields are what the market needs to kick start a fresh leg higher. What we’re watching for now is whether or not we finally start seeing similar resolutions in some of the key stock charts we’re watching, such as Small-Caps, Financials, diversified international indexes, even Crude Oil.

We’re also watching our ratio charts for signs that risk appetite may be picking back up.

As for how we want to position ourselves to capitalize on a potential rising rate environment, it’s Energy, Financials, and all the other cyclical sectors. Value, High Beta, and international stocks should also be beneficiaries.

I did noticed yesterday that Schwab hit an all-time high.

Have a great weekend everyone.