What To Avoid — And Where To Invest — If The Fed Raises Rates

Will they or won’t they raise interest rates? It’s the question at the forefront of investors’ minds going into the next Federal Open Market Committee meeting. The board has considered hiking the federal funds rate for the past year, but hasn’t yet made a move. Many believe that the upcoming December meeting could be the one where we finally see a bump

I’m not here to predict whether or not the Fed will raise rates in December. I don’t know what their plan is… I’m not sure they do either. I do, however, want to give you an idea of what may happen if the rates do rise. 

It’s important to know what sectors could benefit from a possible rate hike — and which ones will suffer — if you want your portfolio to end the year in the black, and not in the red.

Thanks to the folks at Bloomberg, I can run different economic scenarios and see the effects on a variety of financial instruments. So I looked at how a 25 basis point increase would impact the S&P 500. I was astonished to find that one of the best performing sectors is currently one of the most hated.

Higher Interest Rates Could Hurt This Popular Investment
Before I get to the two best performing sectors, let’s discuss the worst performing sector — the one place you shouldn’t be invested if rates rise. 

It should come as no surprise, but the industry that could be hit the hardest if interest rates increase is utilities. Some of the biggest names in the sector will likely take the blunt of the blow, with Duke Energy (NYSE: DUK) and Consolidated Edison (NYSE: ED) leading the pack lower. Now keep in mind that if you hold utility companies in your portfolio this doesn’t mean you should rush to get rid of them. Depending on your investment objective and time horizon a fall like this could also be a good time to pick up more of your favorite utility companies. Just know that they will likely underperform the market in the short term should the Fed raise rates.

The Most Hated Sector Could Be The Most Profitable
It’s the worst performing sector year-to-date, but it could receive a small boost if the Fed decides to raise rates in December. I’m talking about the energy sector.

So if you’ve been tempted lately to pick up on some of your favorite energy companies, now may be the time. Firms like ConocoPhillips (NYSE: COP), Tesoro (NYSE: TSO) and Phillips 66 (NYSE: PSX) could be great additions to your portfolio.

The other sector that’s likely to perform well is financials. Many of the insurance companies are likely to lead the way in this industry as their investment income will likely get a boost from a higher rate environment. A couple of my favorites are ACE Limited (NYSE: ACE) and PNC Financial Services (NSYE: PNC).

What’s The Real Fed Effect?
Most of the analysts concerned about rising interest rates are afraid that it could send stocks tumbling. But the data I’ve gathered begs to differ. In fact, the S&P 500 should go up.

Take a look at this chart. It shows how each sector might perform with a rate hike of 25 basis points, along with the overall market:

As you can see the market could very well get a boost from an interest rate increase and energy and financials could lead the way.

Risks to Consider: This is a hypothetical scenario based on various economic and financial assumptions. This isn’t a crystal ball that can predict the future. 

Action to Take: Picking up on shares of some of the top energy and financial firms could lead to major gains if the Fed decides to raise rates. I gave you five of my favorite picks as a great place to start. Also, now may be a good time to trim back on any utility holdings if you’re investing horizon is on the shorter side. 

If you’re looking for a great way to play the Fed hike and amplify your gains, I encourage you to check out my colleague Jared Levy’s premium advisory Profit Amplifier. He can show you how to profit from the potential rise in energy and financials as well as profit from the fall in utilities with less risk than buying or shorting individual stocks. You can learn more about his strategy here.