How to Handle Rising Interest Rates

In this video, I’ll consider whether you need to take any steps to prepare for higher interest rates.

The Federal Reserve has signaled its desire to raise interest rates. From The Telegraph:

[Story shown in the video, at 0:24.]

There are three primary areas of your financial life to review in preparation for higher rates on the way: stocks, bonds, and debt. Let’s look at each.

The one thing to certainly NOT do in the stock market is sell everything because you were told to “never fight the Fed” because higher rates are bad for stocks.

[Story shown in the video, at 1:41.]

In the three months after John Hussman’s stock-market warning shown in the video, the S&P 500 gained 6%, a very strong showing, and…

Now pundits are saying that the Fed’s desire to raise rates is a vote of confidence in the economy, and therefore good for stocks.

As usual, nobody has a clue in this department.

If you actively manage your stock portfolio, sector allocation can make sense to move your money where rising rates should help.

Financials do well when rates rise because their profits go up. Just look at the Financial Select Sector SPDR (XLF) over the past few months:

[Chart shown in the video, at 3:45.]

Finance is not alone. The classic five defensive sectors were covered by the Financial Times a year ago, and they still apply:

[Story shown in the video, at 5:19.]

In you’re running my Signal system, and you should be, then you need not worry about any of this. Keep running the system because whatever volatility unfolds will boost the system’s profits.

We thrive on changing prices, not constant up or down.

If you actively manage a bond portfolio, consider laddering. What’s a bond ladder?

Here to answer that is Neighborly, the municipal bond broker. From

[Story and image shown in the video, at 6:33.]

If you use a general bond fund in conjunction with a stock fund, the way my Signal system does, then just stay put.

As rates rise, bond prices drop. But most of a bond fund’s profit is from payouts, not price change, so eventually the higher rates offset the price drop.

Plus, my system moves money back and forth between the stock and bond funds, enabling benefit from moving prices on both sides of the equation.

Personal finance reminder: The only good debt is the type used to buy an appreciating asset that will be worth more than the cost of the debt, i.e. a house.

Consumer debt, car loans, all of that borrowed money for depreciating assets should always be zero. If it’s not zero for you, now is a good time to pay it off.

For your home, is now a good time to refinance?

This is tricky to answer. To see why, look at this chart of 30-year rates from the St. Louis Fed:

[Chart shown in the video, at 10:02.]

Key points:

1. Bottomed below 3.5% end of 2012
2. Spiked in 2013 on taper tantrum fears, not increase
3. Jumped only a little when rate rose 25 bp Dec 2015
4. Rose a lot after rate rose 25 bp Dec 2016

Tough call, but I would say there’s no rush.

The Mortgage Bankers Association is predicting a 30-yr rate of 4.7% in Q4

The National Association of Realtors is predicting a 30-year rate of 4.6% in Q4

The current rate is slightly above the midpoint between the recent low and the predicted year-end rate. The easy low rates are gone and there’s no reason to expect a quick jump, so sitting tight hoping to grab 4% later this year is probably as good a plan as any.

To recap: If you’re running my Signal system, keep running it as usual because it’s already built to take advantage of price fluctuations for any reason.

If you’re actively managing your stock and bond funds, consider buying defensive sector stocks and funds, and creating a laddered bond portfolio.

For your mortgage, sit tight and see if you can snag 4% sometime this year, about the middle of the recent range.

Surprisingly, not a lot to do!

Want more videos like this? Subscribe to The Kelly Letter YouTube channel.

Thank you for watching!

This entry was posted in Video. Bookmark the permalink. Both comments and trackbacks are currently closed.
  • The Kelly Letter logo

    Included with Your Subscription:

Bestselling Financial Author