With Higher Interest Rates, Where Should We Invest?

by | Apr 6, 2022 | Stocks to Watch

The Federal Reserve was wrong on inflation.

In fact, most of us knew it was never transitory.

Even Allianz Chief Economic Advisor Mohamed El-Erian said, “The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake,” as quoted by CNBC.

The Fed even raised rates a quarter point at its last meeting to help.

Unfortunately, inflation is still too hot.

“Inflation is running far too high, and I am acutely concerned about this,” Philadelphia Federal Reserve President Patrick Harker just said, as quoted by CNBC.

“The bottom line is that generous fiscal policies, supply chain disruptions, and accommodative monetary policy have pushed inflation far higher than I — and my colleagues on the [Federal Open Market Committee] — are comfortable with. I’m also worried that inflation expectations could become unmoored.”

To bring inflation under control, the Fed now wants hike rates higher than the typical quarter point.

“Many participants noted that — with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level — they would have preferred a 50-basis point increase in the target range for the federal funds rate at this meeting.”

So, with higher rate hikes likely, where should we invest?

Look at Bank of America (BAC), for example, or even the XLF ETF.

“Analysts are bullish on shares because among the big banks Bank of America is one of the most sensitive to interest-rate hikes. With it widely expected that the Fed will raise interest rates at least three times this year, Bank of America would be poised to benefit more than peers,” as noted by Barron’s.

Or look at the SPDR S&P 500 Dividend ETF (SDY).

“While a rise in rates would diminish the attractiveness of dividend stocks with premium valuations and low growth, more high-quality dividend payers or the group of dividend growers may stand out. The dividend growth exchange traded fund strategy has helped investors capture the upside potential of a strengthening equities market through quality company exposure,” says ETF Trends.

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