Stocks Hurt By Rising Interest Rates

- Alan Lavine and Gail Liberman

Douglas Fabian, editor of Successful Investing, Huntington Beach, Calif., says that although the Federal Reserve has not changed its interest rate policy, rates are rising for the following reasons: Inflation, strong economic growth, a huge government deficit, a falling dollar and job creation.

"If rates continue to rise, the stock market could lose its tailwind," Fabian says. "Lower rates have been a windfall to stock prices."

So what stocks could come under pressure if interest rates rise dramatically?

Financial stocks could decline in value, Fabian says. Reason: Their cost of financing rises. Insurance companies, banks and brokerage firms are more profitable when interest rates are low.

For the same reason, utility stocks also could come under pressure.

Preferred stocks may give back some ground since because often are considered a proxy for bonds.

High-yield bonds and municipal bonds may show some price declines. High-yield bonds typically track the performance of the stock market. Nevertheless, rising rates typically lead to lower bond prices.

The real estate sector is one area Fabian is watching closely. In the few weeks since the April 2 strong jobs report, home builder stocks and real estate investment trusts have lost 15 percent.

Even investors who own an S&P 500 index fund or exchange traded fund could feel the pinch. Fabian says financial stocks make up 25 percent of the S&P 500.

In addition to stocks, bond investors should see price declines when interest rates rise. Bond prices move in the opposite direction of interest rates.

As interest rates rise, so will adjustable-rate mortgage payments.

Fabian's advice: "If you own bonds, either sell down those positions in the high yield and long-term bond category, or at the very least, set a sell point now."

If you're doing a long-term loan, he says, stick with a fixed rate.

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Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).