Just a couple of weeks ago I was writing about the 10 year Treasury Note breaking 3% and holding. As of today (October 9, 2018), the 10 year is now holding around 3.2%. In a rising rate environment, how does one invest? Some pundits posit that a rising rate environment is bad for stocks (as rising rates can slow the economy and reduce corporate profits); however, not all rising rate environments are the same. Notably, stocks have moved higher in 12 of the 15 periods since 1950 when the 10 year Treasury was rising (i.e., the market has moved higher 80% of the time). This makes some sense because the Fed usually raises rates as the economy is doing better. If the economy is doing better, then corporate profits are usually up and stock prices are up. So, again, where do I invest?

Answer:

Traditionally, the following stock sectors have performed better during rising rate environments:

• Industrials;

• Tech (please note its already high P/E valuation);

• Consumer Discretionary; and

• Energy

And, here are some stock sectors you may wish to avoid:

• Real Estate; and

• Utilities

Regarding bonds, rising rates hurt current bond holders; however, by keeping your bond portfolio duration short or utilizing shorter term bonds (2 years or less), one can reinvest their matured bond money into new, higher-yielding bonds when their money comes due.

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