After falling to rock bottom levels following the Great Recession of 2008, interest rates are on the rise again.The Federal Reserve raised benchmark rates in December for the fourth time in 2018, bringing them up to a target range of 2.25% to 2.5%. Observers expect those hikes to continue into the following year.
The Fed usually only raises rates by a small amount each time, so there’s little cause to worry about something overly dramatic happening. But a steady climb does affect the economy, including your debt and investments. When interest rates go up, borrowing gets more expensive.
So if you’re planning on taking out a new home mortgage loan or car loan, or refinancing an old one, you may want to keep in mind that rates are likely lower now than they will be in the near future.
And if you have a variable rate loan, you might see your interest rate start to climb. Similarly, credit card interest rates are also likely to go up, so it may make sense to to pay off any balances in full, if possible.
But what happens to your investments when interest rates rise? The answer, though complicated, is worth digging into. Knowing what to expect can help you figure out what you should be investing in and when. We break down how climbing interest rates can often affect investments such as money market accounts, stocks, bonds and commodities.
How Rising Interest Rates Impact Money Market Accounts and CDs
When benchmark interest rates climb, banks and other financial services providers tend to increase the rates they offer on high-interest savings accounts, money market accounts, and certificates of deposit (CDs). Although these rates are still unlikely to match what you’d get from investing in the stock market long term, they can make these financial products a more attractive place to park your money.
If you’re already in a high-interest non investment account, many banks will keep raising your rate without you having to do anything. If you’re not, this could be a good time to start looking around for an institution that’ll put more money in your pocket.
If you already have money in a CD, rising rates won’t do much for you until the term ends, since you’re probably locked into what you signed up for.
How Do Interest Rates Affect Bonds?
When you purchase a bond, you loan money to a company or the government for a set amount of time and receive a fixed return in exchange. When interest rates rise, bond yields—or the return you make on investing in a bond—rise as well.
With interest rates low in recent years, bond yields have been low as well, making them less appealing as an investment. As rates increase, a higher return can make bonds seem more attractive. On the other hand, when demand for bonds increases, the price of bonds can go up, too.
What to Know About the Interest Rate and Stock Market
Unlike some investments, interest rates don’t have a single, clear impact on stock performance. However, rising interest rates have often had a negative impact on the stock market historically. Since borrowing becomes more expensive, consumers may put off taking out mortgages, buying cars or purchasing major household appliances.
Similarly, because they are paying higher interest rates on existing bills, consumers have less money left over to spend on other goods and services. Reduced spending affects companies’ revenues and profits, which can have a ripple effect throughout the stock market.
Like individuals, companies too find it more expensive to borrow when interest rates rise. They may borrow less or have less money left over to invest in their business, potentially slowing growth and reducing profits, all of which can dampen stock performance. Even the psychological impact of anticipated interest rate hikes can be enough to make individuals and companies spend less, causing the market to take a hit in advance of actual increases.
When stock prices decline broadly, the primary market indexes will also go down, which can further reduce confidence in the market. The exception is banks and other companies in the financial sector, such as mortgage or insurance providers, who benefit from higher interest rates and often see a bump in stock value. That often makes those stocks more attractive during rising interest rates.
Despite these trends, there is no guarantee than any given change to interest rates will affect stocks negatively. That’s because the stock market is affected by myriad factors besides interest rates, including current events, trade policies and other economic conditions.
It’s worth remembering that selling stocks out of panic during a downturn isn’t usually a great idea. Instead, it makes sense to buy when stocks are low. Even more importantly, the best predictor of returns is the length of time that your money remains in the market, so resist the urge to pull money out.
How Do Rising Interest Rates Impact Commodities?
Interests rates usually have a more direct relationship to commodities prices than they do to the stock market. Commodities are raw materials or agricultural products, include things like steel, beef and lumber. When interest rates rise, commodities prices usually fall.
That’s because it becomes more expensive for the companies that buy commodities, such as food producers or construction firms, to stockpile them and store them for long periods. As a result, companies will buy more commodities as they need them and lower demand will fuel lower prices.
That said, don’t panic yet: There’s no guarantee if this will happen since factors like inflation also play a role.
How Investing with SoFi Invest® Can Help You Tackle Rising Interest Rates
When you open an automated account with SoFi Invest, you can invest in a bundle of Exchange-Traded Funds. Because your portfolio is diversified across thousands of assets, you have more protection against fluctuations across various types of investments due to rising interest rates then you might if you invested in just one or two stocks.
Plus, a credentialed financial advisor will rebalance your portfolio at least quarterly, so you can know your investments will stay on track with your goals and risk tolerance, even if things start to change due to climbing interest rates.
If you’re a member and have more questions about how to invest in this dynamic environment, you can access complementary financial advice as often as you like. And you can start investing with as little as $100.
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