A rising interest rate environment can have several possible impacts on equities, with some industries designed to ride out this scenario with less volatility than others. In this segment of Backstage pass, recorded on January 10Fool contributors Jason Hall and Toby Bordelon, joined by Fool Canada analyst Jim Gillies, discuss one such headline.
Jason Hall: All right, guys, let’s go ahead and hit a few real quick. Interest rates, I think it was JP Morgan, or one of the big banks is planning four rate hikes this year by the Fed. Most say there will be three.
This is essentially a 1% increase in interest rates by the end of the year. The rates are still going to be super cheap, guys, but the cost of capital is going to go up for a lot of industries and a lot of companies. Jim thinks tech stocks will drop another 90% because of this. He really doesn’t.
Jim Gillies: What? [laughs]
Room: I totally made that up.
Gilles: I said 80%.
Room: The fact is, it is happening and there are real implications. But the question I wanted to ask you guys, I want a 20 second answer here. Let’s go quickly. Let’s do some hot takes on this.
Which stock do you think will make money from rising interest rates over the next decade? Toby, you throw us, then Rachel.
Toby Bordelon: Look, I’ll go with it Charles Schwab (NYSE: SCHW) here. Charles Schwab, great broker. I think financial companies will do well in a rising interest rate environment. They can make money with a spread if they do it right.
They take deposits, they want that money out. Yes, they have to pay more, but if they are good, they can raise the rates they charge more than the rates they pay and therefore increase that gap.
Room: Their interest margin.
Bordeaux: Yeah. It’s one to watch. They acquire TD Ameritrade. This purchase is made. The integration is still in progress. If interest rates are rising, it means the economy is doing well. The Fed raises rates to try to reduce inflation, all that. Signs that the salary will continue to increase further.
People have more money, maybe they’ll save more. Maybe not America because that’s not how we roll. But maybe people will save more. [laughs]
They will put it in a savings account or a brokerage account. Charles Schwab has both banking and brokerage. I think that’s a question to consider, but I’ll say it’s happened before. I have heard this thesis before. I have already promoted this thesis.
I remember ten years ago the former Motley Fool Pro. I think he was investing in TD Ameritrade and maybe Interactive brokers for this reason, among others. It never really played out.
Room: Messed up expectations, I think that’s the word. It happens.
Bordeaux: Maybe it won’t happen, but it’s one to watch.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.