The US Federal Reserve has raised interest rates aggressively in an effort to control inflation. According to Cathie Wood of Ark Invest, this could have serious consequences.
In a series of tweets on Saturday, Wood compares the current situation to events leading up to the Great Depression.
“The Fed raised rates in 1929 to stifle financial speculation, then in 1930 Congress passed Smoot-Hawley, imposing tariffs of more than 50% on more than 20,000 goods and pushing the global economy in the Great Depression,” Wood said. “If the Fed doesn’t pivot, the setup will look more like it was in 1929.”
The super investor points out that the US central bank “is ignoring deflationary signals”. At the same time, she warns that the chip law “could harm commerce perhaps more than we think”.
Of course, not all assets are created equal. Some – like the three listed below – may be able to perform well even if the Fed does not soften its hawkish stance.
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Immovable
It may seem counter-intuitive to have real estate on this list. When the Fed raises its benchmark interest rates, mortgage rates tend to rise as well, so shouldn’t that be bad for the housing market?
While it’s true that mortgage payments have increased, real estate has actually demonstrated its resilience in times of rising interest rates, according to investment management firm Invesco.
“Between 1978 and 2021, there were 10 distinct years when the federal funds rate rose,” says Invesco. “During these identified 10 years, US private real estate has outperformed stocks and bonds seven times and US public real estate has 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 rises, new properties cost more 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 have to be a homeowner to start investing in real estate. There are many real estate investment trusts (REITs) as well as crowdfunding platforms that can help you become a real estate tycoon.
Banks
Most companies fear a rise in interest rates. But for some financials, like banks, higher rates are a good thing.
Banks lend money at higher rates than they borrow, pocketing the difference. When interest rates rise, a bank’s earnings gap generally widens.
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The banking giants are also well capitalized at the moment and have returned money to shareholders.
In July, Bank of America increased its quarterly dividend by 5% to 22 cents per share. In June, Morgan Stanley announced an 11% increase in its quarterly payout to $0.775 per share, after doubling its quarterly dividend to $0.70 per share last year.
Investors can also gain exposure to the group through ETFs like the SPDR S&P Bank ETF (KBE) and the Invesco KBW Bank ETF (KBWB).
Basic consumption
Higher interest rates can cool the economy when it’s too hot. But the economy isn’t getting too hot, and if Wood is right, we could be heading for a major recession.
That’s why investors may want to look into recession-proof sectors like consumer staples.
Basic consumer goods are essential products such as food and drink, household items and hygiene products.
We need these things no matter how the economy is doing or what the fed funds rates are.
When inflation drives up input costs, consumer staples companies – especially those with entrenched market positions – are able to pass these higher costs on to consumers.
Even if a recession hits the U.S. economy, we’ll likely still see Quaker Oats and Tropicana orange juice — made by PepsiCo (PEP) — on family breakfast tables. Meanwhile, Tide and Bounty – well-known Procter & Gamble (PG) brands – will likely remain on shopping lists across the country.
You can access 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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