A top fund manager says stocks are going to be just fine in an era of rising interest rates — and he shares how investors can net juicy returns
Stockswill perform just fine against a backdrop of rising interest rates, ProShares' director of investment strategy said.
- "This idea of rising rates doesn't have to be such a negative on stocks," Kieran Kirwan said in a webcast.
- He discussed one index that tracks US securities whose stock prices have historically shown a high correlation to interest-rate movements.
The dramatic moves in stocks this week were sparked mainly by jitters about the Federal Reserve signaling it's ready to start hiking interest rates soon and bring an end to the easy-money era.
The prospect of higher rates — which typically mean lower returns on stocks in consequence — has been spooking investors into reviewing their portfolios to mitigate risk and position for uncertainty.
The topic has been on everybody's mind, leading to the question: What's next? Some bargain hunters saw opportunities in lower prices and snapped up stocks, pushing the market into a series of volatile sessions this week.
But higher interest rates alone don't have to be a headwind for equities, according to Kieran Kirwan, director of investment strategy at ProShares, an ETF provider that manages about $75 billion in assets.
Kirwan pointed to the S&P 500 Dividend Aristocrats index, which tracks 65 companies in the S&P 500 that have increased dividends for at least 25 years in a row, on a ProShares webcast this week.
In the past five periods of a rising-rate environment, the index has delivered an average return of over 25%, he said.
It's not a given that the same thing will happen this time, Kirwan noted, and the likelihood stocks will be fine doesn't really mean there won't be volatility in certain segments of the market.
But he suggested stocks will be able to perform well — it's just that investors must choose carefully.
Fed Chair Jerome Powell this week showed greater concern about persistent
"We do believe that this idea of rising rates doesn't have to be such a negative on stocks," Kirwan said on the 2022 market outlook webcast.
"Stocks can — and have, in fact, in the past done just fine in periods of rising rates."
The investment strategist acknowledged that higher interest rates affect certain market segments vulnerable to low profitability, as well as companies that have a high price-to-earnings ratio.
"But the cool thing about this is that if you kind of step back for a second, investors can also play a little bit of offense in a rising rate period," he said. "And by focusing on certain sectors, and certain types of stocks, one can actually outperform."
He highlighted segments historically positively correlated with the 10-year Treasury yield, which typically goes up when interest rates rise. One example is the NASDAQ US Large Cap Equities for Rising Rates, he said.
The index, made up of 50 stocks across five sectors, is up 30% in the last year, and up 1% so far in January. By comparison, the S&P 500 is down 8% this month.
"So a little bit of an idea there, a little bit of diversion away from the traditional chatter that rising rates are negative," Kirwan said. "They can, in fact, be an opportunity."
Read More: An ex-foreign exchange trader at the New York Fed breaks down why he's on alert for a rapid series of rate hikes that confirm investors' deepest worries — and shares how he's advising clients to navigate the bumpy markets
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