Stocks Can Thrive With Rising Rates But REITs Get Rocked

All things equal, higher interest rates are generally considered negative for stocks, but a look at recent periods of escalating rates shows that they are far from deadly, sometimes even benign. Interest rates at higher levels provide stronger competition for investment dollars, and they raise corporate borrowing costs, too. In discounted cash flow models, higher rates mean a higher discount rate, which reduces the value of future earnings and dividends—and stock prices. How much they’re reduced depends on how high rates go.

History shows that higher rates do not always harm stocks. The two periods in recent history that saw rates rise this much were in 1993-1994 as the Fed tightened, and in 1998-2000 as financial markets recovered from the Asian financial crisis and the collapse of Long Term Capital Management. To be sure, rising rates take their toll on fixed-income. Among equities, REITs have been losers. The iShares Cohen & Steers Realty Majors (ICF) is down 3.7% since interest rates hit bottom. Mortgage REITs, tracked by the REM, have been especially allergic to higher rates, down 6.1%.

Source: Forbes

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