How to Profit From Rising Interest Rates
On March 16 the FOMC committee will decide if they will raise interest rates.
Raising interest rates often has a nefast effect on the economy. This is due to businesses and individuals needing to pay a higher premium in order to loan money. The higher risk-free rate encourages people to save more money.
Rising interest rates negatively affect the stock market. But there are a couple of sectors that do well when interest rates are raised…
Banks
During high-interest rates, banks make more money, but why? You would think that people would want to borrow less money from the bank due to the higher premium. Instead, banks make more money because the difference is higher between the savings rate they need to pay customers and the rate they receive from investing.
Insurance
Insurance companies are able to pay you back due to them having substantial amounts of assets on their balance sheet. Most insurance companies hold bonds instead of cash. When the interest rates increase, the bond yield rises.
Profitable Companies
When interest rates are raised, the unprofitable companies go down the most and the fastest. So try to invest in companies like Apple or Amazon, not like Spotify, Uber, or Peleton.
Large Balance Sheet
Try to invest in companies having loads of assets. A large number of assets causes them to increase their bottom line due to the higher risk-free rate they can get.
