How Interest Rate Hikes Affect Your Investments
As the Federal Reserve lifts interest rates up from their historically low levels, you're likely to start seeing the effects on your financial holdings. It's important to understand how these changes will affect different types of accounts and investments in order to be prepared for the results.
Rising interest rates tend to have a mixed effect on stocks. On the one hand, as interest rates go up it becomes more expensive for companies to borrow money. They may be forced to tighten their belts a bit, causing profits (and stock prices) to droop. And when debt becomes more expensive, consumers may be forced to cut back on their spending; that can also cause a drop in profits and therefore a drop in stock value.
On the other hand, companies that lend money rather than borrow it (banks, mortgage lenders, insurance companies, and so on) may have their profits and stock prices climb during an interest rate hike because they can pass the increased costs along to their customers in the form of higher interest rates. Thus, stocks in the financial sector tend to benefit as rates move higher.
Source: Fool.com
