How to Invest After an Interest Rate Hike

interest rate hikeThe U.S. Federal Reserve said no to an interest rate hike in September, but the Fed still wants at least one rate hike before the end of the year.

At the end of the September FOMC meeting, Fed Chair Janet Yellen also said the case for a rate hike had "strengthened."

That's why we're giving readers a complete guide on how to invest after an interest rate hike.   This guide will help you protect - and even grow - your money after an interest rate hike. Our guide is packed full of research and wisdom from some of Money Morning's top experts and investment analysts.

But before we get to our guide, let's look more closely at when you can actually expect an interest rate hike.

When Will There Be an Interest Rate Hike?

The Fed doesn't plan on keeping interest rates this low indefinitely. At its September FOMC meeting, the Fed announced its long-term interest rate target is 2.9% by 2020. Right now, the effective federal funds rate sits at 0.40%.

So taking the Fed at its word, it looks like we can expect rates to rise steadily over the next four years. As for this year, the most likely month for an interest rate hike is December, according to the CME Group. The American futures company's FedWatch tool, which expresses the market's view on changes in monetary policy, estimates a 48.1% chance of a rate hike in December as of Sept. 27. For November, the probability of an interest rate hike is just 8.3%.

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Remember, even though the next rate hike will be meager - just 0.25 basis points - it can still have a big effect on the markets. Last December's 0.25% rate hike contributed to an almost 10% drop in the S&P 500 between early January and mid-February.

Plus, an interest rate hike - no matter how small - has all sorts of effects on your money, from your savings account to your credit card rates.

So when the Fed does eventually raise interest rates, you need to be prepared. You can position yourself now to protect your money and even profit from rising interest rates.

Start by checking out our full investment guide, packed with expert advice from our analysts...

Interest Rate Hike Investment Strategy No. 1

The first strategy is to buy companies low floating-rate debt.

As the federal funds rate rises, the interest rate on certain types of debt can also rise. This specifically impacts corporations that sell floating-rate notes, a type of debt with an interest rate fixed to a market reference rate. In most cases, that reference rate is the federal funds rate.

Right now, some companies are loading up on this type of debt because it's cheap. But having too much floating-rate debt can be a major problem once interest rates rise.

Take McDonald's Corp. (NYSE: MCD), for instance. In a September 2015 report, Goldman Sachs flagged the fast-food chain as having a high share of floating-rate debt compared to other blue-chip public companies.

And looking at McDonald's debt levels, you can see Goldman is spot on. The company's total debt growth has risen almost 54% since December 2014, according to FactSet. McDonald's currently holds almost $24 billion in long-term debt as of December 2015. That's debt owed for a period exceeding 12 months from the date of the balance sheet and includes nearly $4 billion of floating-rate debt.

McDonald's net operating cash flow is about $6.3 billion, so it could pay off its floating-rate debt if necessary, but it's still left with a lot of long-term debt, regardless.

Other companies with a high number of floating-rate notes include Kinder Morgan Inc. (NYSE: KMI), BlackRock Inc. (NYSE: BLK), and Metlife Inc. (NYSE: MET).

Popular companies with low floating-rate debt include Alphabet Inc. (Nasdaq: GOOGL), Pepsi Co. (NYSE: PEP), and Priceline Group Inc. (Nasdaq: PCLN), according to Goldman.

Interest Rate Hike Investment Strategy No. 2

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Grab Treasury bills or corporate bonds.

As interest rates climb, short-term Treasury bonds become more attractive. These bonds, also known as Treasury bills, have maturity dates of four, 13, 26, and 52 weeks. In effect, an interest rate hike drives down prices on these short-term bonds, increasing their associated yields. Long-term bonds, like a 30-year T-bond, are relatively unaffected by an interest rate hike. But a 10-year T-note yield may still gain slightly from an interest rate hike.

Money Morning Chief Investment Strategist Keith Fitz-Gerald, who has over 33 years of experience as a market analyst, recommends T-notes to offset portfolio volatility and capture steady gains.

"The reason you want the shorter duration notes is that buying them not only helps you get around the massive drop in value that will happen if the Fed raises rates further," Fitz-Gerald said on Feb. 18, "but also ensures you avoid most of the volatility that will affect longer-term bond holders over time."

The same line of thinking goes for corporate bonds, too. Just make sure they're short-term bonds as well. You may even want to try a mutual fund that pools together different short-term corporate bonds.

If you don't want to purchase actual bonds, consider the Vanguard Intermediate-Term Corporate Bonds Index (MUTF: VICSX). The fund has an average duration of 6.4 years, with year-to-date returns around 5.5%. And since the Fed's last interest rate hike in December, the fund has gained 6.5%.  

Interest Rate Hike Investment Strategy No. 3

The third tip is to buy "must-have" companies.

Investors can outplay the Fed by buying must-have companies. No matter what the Fed does, must-have companies will continue to profit. According to Fitz-Gerald, these are companies that create products that the world can't live without. They also tap into Fitz-Gerald's six Unstoppable Trends, each of which is backed by trillions of dollars and is essential to the global economy. His six Unstoppable Trends include:

  • Demographics: For the first time in history, the number of people aged 65 and older will outnumber children younger than five worldwide by 2020. That means surging profits for medical companies.
  • Scarcity/Allocation: This not only includes the fixed amount of precious commodities, like oil or gold, but also money itself. Scarce resources drive demand - and profits.
  • Medicine: In the past decade, federal healthcare spending in the United States has topped all other sectors, including education and defense. This year, healthcare spending exceeded $1.4 trillion - nearly a quarter of all federal government spending. This is guaranteed market share for medical companies and insurance providers.
  • Energy: Analysts love to hate on the energy sector, but there will always be a demand for energy - both renewable and nonrenewable.
  • Technology: People will always have a strong demand for the latest and greatest technologies. That makes tech a perennial growth industry.
  • War, Terrorism & Ugliness: As the struggle against ISIS and tension in the Middle East escalates, defense companies will flourish. And the U.S. Department of Defense will continue spending billions on national defense every year.

As the market hits all-time highs, Fitz-Gerald suggests that investors concentrate on growth stocks with predictable long-term potential. [Editor's Note: Get the ultimate must-have stock recommendation from Fitz-Gerald, right here].

"If you want to look at defense contractors, that's a logical play right now," Fitz-Gerald said in a CNBC interview on Sept. 9. "If you want to look at technology, you can make the argument on a longer term, Apple Inc. (Nasdaq: AAPL) is still a viable company with lots of potential."

For defense, Fitz-Gerald continues to recommend big U.S. contractors like Raytheon Co. (NYSE: RTN) and Lockheed Martin Corp. (NYSE: LMT). Both stocks are up more than 200% over the past five years and still have market-beating potential from here.

For tech, as Fitz-Gerald mentioned, Apple is always a fantastic play. In fact, Fitz-Gerald has a price target of $200 per share for AAPL stock over the next 24 months. He bases his prediction on Apple's technology, not its devices. Fitz-Gerald also believes that Apple's push for more services is a smart move, which promises the company lasting gains, even if its devices fail to impress.

Other great, must-have tech companies include Inc. (Nasdaq: AMZN) and Facebook Inc. (Nasdaq: FB).

Rate Hike Investment Strategy No. 4

Take short-term positions in reverse exchange-traded funds (ETFs).

As we mentioned previously, the markets had a knee-jerk, 10% correction after the last interest rate hike in December. To protect your portfolio against a similar possibility this time around, Money Morning Capital Wave Strategist Shah Gilani recommends readers take short-term positions in reverse ETFs.

This type of investment actually gains as the stock market falls. Gilani, who has 30 years of experience as a CBOE trader, likes the ProShares Short S&P 500 ETF (NYSE Arca: SH) as his go-to reverse ETF. This fund tracks the inverse performance of the S&P 500, which would be hit hard by any negative reaction to an interest rate hike, according to Gilani.

To give you an idea about this fund's potential, during the stock market correction from January to mid-February, this fund gained over 9%. Keep in mind, reverse ETFs are only meant for short-term profit plays and are by no means a long-term investment.

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