Shelter From Rate Hikes?

Health care and consumer staples tend to stay strong

Where does the smart money go when interest rates climb? The Federal Reserve has hiked interest rates twice since June, boosting its target federal funds rate to 5.25%. Sam Stovall, senior sector strategist for Standard & Poor's, has taken a look at which industries may thrive as yields climb.

Searching for shelter from rising rates? Look no further than health-care and consumer-staple stocks. In a study for S&P FundAdvisor (, I examined the performance of 44 industry sectors in 12 six-month periods following Fed rate hikes, going back to 1946. The biggest winners: major drugmakers, which averaged a six-month gain of 5.6% when rates rose and outperformed the Standard & Poor's 500-stock index in 10 of the 12 periods. By contrast, the S&P averaged a loss of 0.1% during Fed tightening. Consumer staples--personal-care products, alcoholic beverages, soft drinks, and tobacco--did slightly less well than pharmaceuticals. But each of these sectors outperformed the S&P during at least 7 of the 12 rate-hike periods, posting gains of 1.9% to 3.5%.

Health and personal-care companies are less sensitive to higher rates because demand for their products is relatively stable through changing economic conditions. Even in dire times, people buy aspirin, cigarettes, and toothpaste. And while computer-hardware shares have tended to do well as rates climb, with today's high valuations, I don't see technology as a safe haven.

STAPLE VOID. Mutual-fund investors have several choices (table). A fund screen run by my S&P colleague Colette Coffman found that four general health-care-sector funds had positive returns when the Fed hiked rates and devastated the bond market in 1994. Fewer funds concentrate on consumer staples. Coffman notes that most funds marketed as consumer-oriented plays are loaded with cyclical stocks, such as Home Depot, which tend to fare badly when rates rise.

The Fed has hinted it may be done raising rates for now. Still, I'd avoid interest-sensitive sectors. Financials, such as banks and insurers, face a higher cost of funds. Consumer cyclicals, such as auto makers, suffer lower sales. And capital-goods makers face falling demand as companies slash capital outlays. Other sectors look better as the Fed keeps the economy in check.

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