The U.S. Federal Reserve has been raising interest rates aggressively in an effort to bring inflation under control, and all signs point to another hefty hike coming tomorrow.
According to Ark Invest’s Cathie Wood, this could have serious consequences. In a series of tweets last month, Wood compared the current situation to events that led up to the Great Depression.
“The Fed raised rates in 1929 to squelch financial speculation and then, in 1930, Congress passed Smoot-Hawley, putting 50%+ tariffs on more than 20,000 goods and pushing the global economy into the Great Depression,” Wood says. “If the Fed does not pivot, the set-up will be more like 1929.”
The super investor argues that the U.S. central bank is “ignoring deflationary signals.” At the same time, she warns that the Chips Act — designed to support semiconductor manufacturing in the U.S. but restrict it elsewhere — “could harm trade perhaps more than we understand.”
Of course, not all assets are created equal. Some — like the three listed below — might be able to perform well even if the Fed doesn’t soften its hawkish stance.
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Real estate
It may seem counterintuitive to have real estate on this list. When the Fed raises its benchmark interest rates, mortgage rates tend to go up as well, so shouldn’t that be bad for the real estate market?
While it’s true that mortgage payments have been on the rise, real estate has actually demonstrated its resilience in times of rising interest rates, according to investment management company Invesco.
“Between 1978 and 2021 there were 10 distinct years where the federal funds rate increased,” Invesco says. “Within these 10 identified years, U.S. private real estate outperformed equities and bonds seven times and U.S. public real estate outperformed six times.”
It also helps that real estate is a well-known hedge against inflation.
Why? Because as the price of raw materials and labor goes up, new properties are more expensive to build. And that drives up the price of existing real estate.
Well-chosen properties can provide more than just price appreciation. Investors also get to earn a steady stream of rental income.
But you don’t need to be a landlord to start investing in real estate. There are plenty of real estate investment trusts (REITs) as well as crowdfunding platforms that can get you started on becoming a real estate mogul.
Banks
Most businesses fear rising interest rates. But for certain financials, like banks, higher rates are a good thing.
Banks lend money at higher rates than they borrow, pocketing the difference. When interest rates increase, the spread of how much a bank earns typically widens.
Banking giants are also well-capitalized right now and have been returning money to shareholders.
In July, Bank of America boosted its quarterly dividend by 5% to 22 cents per share. In June, Morgan Stanley announced an 11% increase to its quarterly payout to $0.775 per share — and that’s after it doubled its quarterly dividend to $0.70 per share last year.
Investors can also get exposure to the group through ETFs like the SPDR S&P Bank ETF (KBE) and the Invesco KBW Bank ETF (KBWB).
Consumer staples
Higher interest rates can cool down the economy when it’s running too hot. But the economy is not running too hot, and if Wood is right, we could be heading into a major recession.
That’s why investors may want to check out recession-proof sectors — like consumer staples.
Consumer staples are essential products such as food and drinks, household goods, and hygiene products. We need these things regardless of how the economy is doing or what the federal funds rates are.
When inflation drives up input costs, consumer staples companies — particularly those with entrenched market positions — are able to pass those higher costs onto consumers.
Even if a recession hits the U.S. economy, we’ll probably still see Quaker Oats and Tropicana orange juice — made by PepsiCo (PEP) — on families’ breakfast tables. Meanwhile, Tide and Bounty — well-known brands from Procter & Gamble (PG) — will likely remain on shopping lists across the nation.
You can gain access to the group through ETFs like the Consumer Staples Select Sector SPDR Fund (XLP) and the Vanguard Consumer Staples ETF (VDC).
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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