Taking Cover from a Rate Hike

If the Fed does move, here's how various industries performed when the cost of borrowing went up

By Sam Stovall

The Jan. 28 press release issued by the Federal Open Market Committee -- the Federal Reserve's policy-setting arm -- at the conclusion of its two-day meeting made investors think that the Fed could raise interest rates sooner than expected (see BW Online, 01/29/04, "A Big Jolt from the Fed's Small Switch"). As a result, the Dow fell 1.33% on the day, while the Standard & Poor's 500-stock and Nasdaq composite indexes dropped 1.36% and 1.87%, respectively.

With an apparent shift -- however slight -- in the Fed's timetable for hiking rates, it seems only natural for investors to begin questioning their holdings of economically sensitive sectors of the market. But should they?


  Since 1970, interest rates have risen over seven periods. I decided to take a look at the behavior of the broader market -- and of S&P subindustries -- during those times. In the six months before the initial increase, investors appeared to be unaware of the impending rate hikes. Witness the 8.7% average increase in the S&P 500 during those periods. And further, an overwhelming majority of subindustries posted average increases in this period (particularly for those that were around for all seven observations).

Then I looked at the six-month period after the initial rate increase. The S&P 500 recorded an average decline of 3.7%, and very few industries registered advances.

While history should always be viewed as guide and not gospel, investors may use this information as a gauge of which areas may be hit hardest when the Fed ultimately decides to raise rates. Take a look at the table below, which shows the best- and worst-performing subindustries in the six months after the Fed hikes rates. Each was around for all seven observation periods of the study:

Best-Performing Industries after a Rate Hike
Industry % Chg. 6 mos. after hike
Electronics (Instrumentation) 5.1
Beverages (Alcoholic) -0.6
Electrical Equipment -1.3
Broadcasting (TV, Radio & Cable) -1.3
Computers (Hardware) -2.1
Oil (Domestic Integrated) -2.1
Household Products (Non-Durables) -2.1
Health Care (Medical Products & Supplies) -2.2
Beverages (Non-Alcoholic) -2.2
Publishing - Newspapers -2.3
S&P 500 -3.7
Worst-Performing Industries after a Rate Hike
Insurance (Property-Casualty) -12.2
Lodging-Hotels -12.9
Textiles (Apparel) -13.1
Building Materials -13.1
Waste Management -13.1
Gold & Precious Metals Mining -15.0
Household Furnishings & Appliances -16.5
Trucks & Parts -17.7
Homebuilding -18.1
Savings & Loans -21.2


  The list of those with the best six-month performances after a rate hike may surprise, as only beverages, health care, and household products come to mind as typical defensive plays. But the roster of those industries with the worst showings contains no shocks. Each is a textbook example of groups most directly exposed to rising rates.

Amid market jitters that a rate hike is suddenly not so far away, should investors now abandon stocks, or at least hold off on committing new money? Not necessarily. Let's face it, a 3.7% average decline isn't much, especially after seeing the S&P 500 slump nearly 1.5% in one day alone. And any weakness in stocks can have a bright side. We at S&P view periods of market uncertainty as opportunities for investors with disciplined approaches.

Stovall is chief investment strategist for Standard & Poor's

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