Rising Interest Rates: How Investors Should Be Positioned
After years of falling interest rates, a sea change could be underway, with some investors already starting to hedge their investments in preparation for an uptick.
"We've put in a bottom in the interest rate market, and it's only going higher from here," said Adam Hewison, president and chief strategist at INO.com. "What that may do is what Ben Bernanke's been trying to do for the last few years—lure people to come in and buy."
Since the financial crisis, the Fed has taken unprecedented steps to lower rates in an effort to encourage borrowing and economic growth, pushing the federal funds target rate to a record low level of between 0 percent and 0.25 percent. But the yield on the benchmark 10-year Treasury notes has climbed since the beginning of May to above 2 percent amid signs of an improving economy and recent chatter over when the Federal Reserve will start scaling back its bond-buying program.
(Read More: Stock Funds See Day in the Sun as Bonds Suffer)
The 10-year yield increased to 2.19 percent Monday after a report showed that homebuilder sentiment jumped to a seven-year high in June amid more talk of Fed tapering. The yield hit a 14-month high of 2.29 percent last week.
"Household wealth has come back to all-time highs, housing market is strengthening and consumer income is strengthening," said Brad McMillan, chief investment officer at Commonwealth Financial Network. "When the Fed talks about exiting and rising rates, that's a signal of success in the economy. It's good for companies, but at the same time, higher interest rates could lead to repricing of stocks."
Even JPMorgan CEO Jamie Dimon, speaking at a financial industry conference last week, said borrowers should be prepared for higher interest rates.
If the economy is improving, more jobs are created and profitability is high, so "no one is going to care" about higher rates, he said, adding that he would prefer "normalization in good circumstances sooner than later."
Other investors agreed that rising interest rates does not necessarily imply bad news for the equity market.
(Read More: Best Stocks for a Volatile Market)
"Rates are rising because uncertainty is lifting and the economy is getting better. It's a good environment to own any stocks, but you want to own the cyclical stocks in particular," said John Canally, investment strategist and economist at LPL Financial. "If yields are rising, it means growth is improving and companies have pricing power. … It's not the end of the world when rates go up, as long as it's going up for the right reason, and stocks generally do OK."
Some strategists recommend the banking sector as a way to benefit from rising rates.
"Banks look like they want to move higher," Hewison said. "They'll attract more deposits ... and that will help them."
Meanwhile, Hewison said investors may want to hold off on jumping into dividend stocks. In particular, he remains "mixed" on the health care and utilities sectors.
Meanwhile, some investors say it's too early to speculate how interest rates will move, as their direction is closely tied to the Federal Reserve's actions.
"We've been everywhere," said Matt Kaufler, portfolio manager at the Federated Clover Fund. "While we expect a scenario where we end the year higher than where we are right now, it's not something we're bold enough to make a prediction on or make a change to our portfolio."
"At the extent they're ticking up, it will eventually have an effect on refinancing activity and housing at some point, but I don't think we're there yet," he said. "We're in a range where rising rates may create some day-to-day jitters, but even if interest rates go up another 100 basis points, housing's still affordable and credit creation is still on track."
(Read More: Companies Love Debt as Bond Bear Lurks)