The US Federal Reserve has been raising interest rates aggressively in an effort to bring inflation under control. According to Ark Invest’s Cathie Wood, this could have serious consequences.
In a series of tweets on Saturday, Wood compared the current situation to the events that led to the Great Depression.
“The Fed raised rates in 1929 to squelch financial speculation and then, in 1930, Congress passed Smoot-Hawley, placing 50%+ tariffs on more than 20,000 goods and pushing the global economy into the Great Depression,” says Wood. “If the Fed does not pivot, the set-up will be more like 1929”.
The super investors pointed out that the US central bank “ignore deflationary signals”. At the same time, he warned that the Law of Chips “may harm trade probably more than we understand.”
Of course, not all assets are created equal. Some – such as the three listed below – may be able to perform well even if the Fed does not soften its hawkish stance.
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It seems counterintuitive to have real estate on this list. When the Fed raises benchmark interest rates, mortgage rates also tend to rise, so is that bad for the housing market?
While it’s true that mortgage payments have risen, real estate has shown its resilience in times of rising interest rates according to investment management firm Invesco.
“Between 1978 and 2021 there were 10 distinct years in which the Federal Funds rate increased,” Invesco said. “Over the 10 years identified, US private real estate outperformed equities and bonds seven times and US public real estate outperformed six times.”
It also helps the real estate well-known hedge against inflation.
Why? Because as raw material and labor prices rise, new properties cost more to build. And that drives up real estate prices there.
A well-chosen property can provide more than just price appreciation. Investors also get a steady rental income.
But you don’t have to be a landlord start investing in real estate. There are many real estate investment trusts (REITs) as well as crowdfunding platforms that can get you started as a real estate mogul.
Most businesses are afraid of rising interest rates. But for certain financials, like banks, higher rates are a good thing.
Banks lend money at a higher rate than they borrow, making up the difference. When interest rates rise, the spread of how much a bank earns typically widens.
The banking giant is also capitalized today and has returned cash to shareholders.
In July, Bank of America raised its quarterly dividend by 5% to 22 cents per share. In June, Morgan Stanley announced an 11% increase to its quarterly payout to $0.775 per share – and that’s after doubling its quarterly dividend to $0.70 per share last year.
Investors can also gain exposure to the group through ETFs such as the SPDR S&P Bank ETF (KBE) and the Invesco KBW Bank ETF (KBWB).
Higher interest rates can cool the economy when it overheats. But the economy isn’t overheating, and if Wood is right, we could be headed for a major recession.
That’s why investors may want to check out recession-proof sectors – like consumer staples.
Consumer staples are essential products such as food and beverages, household goods, and healthcare products.
We need these things regardless of how the economy is doing or what the federal funding level is.
When inflation drives up input costs, consumer staples companies — especially those with market positions — can pass on higher costs to consumers.
Even if the recession takes a toll on the U.S. economy, we’ll probably still see Quaker Oats and Tropicana orange juice — made by PepsiCo ( PEP ) — on the family breakfast table. Meanwhile, Tide and Bounty – a well-known brand from Procter & Gamble (PG) – will likely remain on shopping lists across the nation.
You can gain access to the group through ETFs such as the Consumer Staples Select Sector SPDR Fund (XLP) and the Vanguard Consumer Staples ETF (VDC).
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This article provides information only and should not be construed as advice. It is provided without any guarantee.