As an Investor, What You Can Do About Rising Interest Rates

As my long-time readers are fully aware, one of the concerns I have brought up over this past year has been the reaction in the economy to what I believed would occur—higher interest rates.

As we are now seeing interest rates increase, the result of this action is beginning to seep through into the economy.

One of the pillars of economic growth at any level is consumer confidence. Consumer confidence drives our economy, especially since consumer spending accounts for approximately three-quarters of the total gross domestic product (GDP). While some readers might have disagreed with my forecast earlier in the year, there is no argument at this point—interest rates are rising.

The real question is: what happens to consumer confidence going forward? Answer that, and you will answer the next logical question: what happens to economic growth?

New data are beginning to come out that show consumer confidence is beginning to weaken. According to the Thomson Reuters/University of Michigan’s preliminary U.S. consumer sentiment data results, it appears that consumer sentiment in September will drop to a five-month low.

Consumer sentiment data for September is at 76.8, down substantially from the 82.0 that analysts had expected. In the report, it clearly states that Americans are increasingly concerned about higher interest rates and how they will affect them. (Source: “U.S. Consumer Sentiment Sinks in September on Interest-Rate Fears,” Reuters, September 13, 2013.) And this is what has been my exact fear over the past six months—that economic growth could be curtailed by a drop in consumer confidence as interest rates rise.

Much of the economic growth we’ve seen over the past couple of years has been a direct result of the low interest rate policy set by the Federal Reserve. While it’s positive to have some economic growth, what we need are sustainable interest rate levels that can continue to drive consumer confidence going forward.

The artificially low levels of interest rates have to end at some point, and then the question will arise: can consumer confidence maintain economic growth without such unprecedented monetary stimulus?

Even though current levels of interest rates are historically low, the rise over the past few months is creating uncertainty in consumer sentiment and, possibly, economic growth.

As an investor, what should you do?

If consumer sentiment continues to decrease, I would avoid sectors that are directly susceptible to any drop in economic growth. This means discretionary spending, as well as interest rate-sensitive sectors.

As an example, since Americans are not seeing an increase in wages, the higher interest rates as well as higher energy costs mean that there is less money to spend on that extra pair of jeans. I think this is part of the reason why many retail stocks are seeing a lack of revenue growth.

I would pay close attention to the consumer sentiment data over the next few months. If the average American can absorb higher interest rates, then perhaps consumer sentiment can also stabilize and economic growth can continue. However, I would still avoid stocks that have profited from low interest rates over the past couple of years, along with discretionary spending companies until wages begin to re-accelerate.

This article As an Investor, What You Can Do About Rising Interest Rates was originally published at Investment Contrarians