There has been a lot of talk these last few months about what will happen to portfolios when the Fed eventually raises interest rates. The Fed will only make changes to its low-interest policy when the economy confirms it will continue to improve. The earliest the Fed would make any changes would be in September, although some experts predict it won’t happen until 2014. Below are a few key points that can help put this into perspective and explain what this means for you:
If interest rates were to rise…
- Changing trends could provide new investment opportunities.
- We could see certain domestic bonds decrease in value. Not all bonds but certain types, such as long-term government backed bonds, may be more affected than others when rates do rise. We see opportunities in short duration funds or funds with global diversification or a variety of sub asset classes (such as corporate bonds, senior loans, convertible bonds).
- It could strengthen the dollar thus making stocks more attractive (both small and large cap could be buying opportunities).
- The financial sector (regional banks, insurance companies, etc.) could be an opportunity as they historically perform well during periods of rising interest rates.
- Large Multinational companies based in the US could see their values go down as a result of the strengthened dollar, while multinationals based outside of the US could be a better investment.