““Slowdown in an economy, Inflation often continues to rise, short term rates are high and rising ( inverted yield curve)” Then it says in text. " Best stocks to own are interest rate sensitive stocks such as utilities and Financial services”. Is this because bond prices are going down in prices from the rising interest rates, that people look for “safe” stocks, or is there a direct effect of rising interest rates on these types of stocks that someone could please explain to me. thanks
its because as the economy slows interest rates are expected to fall in the future as inflation will subside so as interest rate falls you want to hold interest rate sensitive stocks.
At the same token, FI will have higher prices ?
FI prices will rise either in anticipation of a rate decrease or after a rate decrease. of course, this explanation is simplified as i didn’t take into account future inflationary expectations.
Oh i get it, the way they word what to hold in regards to current state of the economy, is to take advantage of what will happen in the next phase of the economy. e.g SLOWDOWN- Rising I/R’s- Best to hold interest rate sensitive stocks and LONG duration bonds. When I first see this, I get all confused, because I figured if interest rates are rising, you would want to hold short duration bonds. But THEN the next phase of economy is RECESSION “Short term rates fall” So you start buying these high duration bonds and interest rate sensitive stocks in the SLOWDOWN AFTER Rates have risen, so you could take advantage of the falling rates in the next cycle of the economy when rates will fall again. I was just confused because I thought they were saying to buy these instruments to take advantage of the rising rates in the slowdown, but i guess they were one step ahaead.