Let us start with the most obvious and that is consumer loans such as credit cards, mortgages, and auto loans. When the Fed decides it is time to raise interest rates, the raise affects the base interest rate at which these loans are based. Some loans have a LIBOR plus interest type of loan, which every time the interest rate increases it will change the interest being paid on the loan. This is the typically affects many feel when the interest rate are increased.
Switching over to the equities and how they may react, first and foremost, banks typically enjoy seeing rates increased due to the fact they can earn a higher rate of return on their loans. One can then argue that the consumer will no longer want to apply for a loan due to the higher interest rate, however people are still gong to get loans despite the interest rate hikes. This is also great for investing banks because they can begin earning a higher return in areas such as bonds and their investments in debt will earn more.
An area in the equity market to watch is homebuilders because if the interest rates gets to a point that discourages consumers wanting to apply for a loan, this can domino into the new home building area and affect the stock accordingly. You can watch other similar areas but there is that balance of raising the interest rate and when it becomes to high that is begins to affect lenders and companies that depend on the consumer obtaining loans.
Right now I believe the interest rates are sitting in a good spot that appears to be working for everyone, but once they creep up another percent or two, we could begin to see a shift in lending and there may be some resistance by the consumer. On the other side of the coin, investors will be earning more and this could make them feel better about finance. Each move has pros and cons, but the important part is to be prepared for the shifts and allocate funds accordingly to hedge against any risk you may face. People are anticipating one or two more rate hikes so keep an eye on the Fed for when those may happen.
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Try AI Portfolio ArchitectNathan Young is a Senior Member of Macroaxis Editorial Board - US Equity Analysis. With years of experience in the financial sector, Nathan brings a diverse base of knowledge. Specifically, he has in-depth understanding of application of technical and fundamental analysis across different equity instruments. Utilizing SEC filings and technical indicators, Nathan provides a reputable analysis of companies trading in the United States.
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