Stocks For Rising Rates

January 7, 2022

We trust the bond market around here.

I don't have a lot of faith in people, or media or economists. But bonds are something we certainly take seriously.

There's no bullshit with them.

The biggest players in the world have no choice but to be intimately involved in fixed income markets. So if you're curious which way the pendulum is swinging, you'll be able to see it in bonds.

Here's a quick look at US Interest Rates making new highs - from the 1yr to 10yr yields these are going towards the upper right:

And I realize many people do not represent the largest financial institutions in the world and don't necessarily have to be involved in bonds.

That's where our intermarket analysis comes into play.

We want to answer the question, "Which stocks tend to do well when rates are rising?"

Well, as it turns out, there's an ETF for that (of course there is):

As you can see here the $EQRR ETF representing Equities for Rising Rates looks exactly like the US 10yr Yield.

And when you look inside of it, almost 60% of the entire index is represented by Financials and Energy. So when you equally-weight the Financials and Energy Indexes (XLF + XLE), you get a line that looks exactly like the other two, also pushing up towards the upper right.

Interesting when you add in the $EQRR exposure to Materials and Industrials, now you're looking at close to 90% of the entire index is composed of those 4 sectors: XLE, XLF, XLB & XLI.

These are the types of names that historically do well when rates are rising.

And as it turns out, those are the areas that have been doing well, and especially so when you compare them to more Growth oriented areas like Technology that have really been hit hard, especially as you move down the cap scale.

We discussed this earlier in the week.

Be careful what you're buying. Be aware of which types of stocks you own.

You might not care about the bond market. But your portfolio certainly does.

It's important to be aware.