Here's What Stocks Do When Interest Rates Are Rising

For the most part, Wall Street’s interest rate strategist expect interest rates to rise in 2014.

Intuitively, many believe this is bad news for stocks as it is a sign of rising debt costs.

However, rates often rise because the economy is improving. And if rates are rising because of inflation, that’s ok too because corporations pass inflation through to their customers by raising prices. This is why academics often say stocks are a hedge against moderate inflation.

Generally, the asset class that gets hit most directly is bonds.

“Most investors fear rising interest rates,” write the folks at BlackRock. “But perhaps more than the others, bond investors fear the loss of portfolio value that may occur when interest rates rise. Which begs the question — are there alternatives to bonds that might offer income and behave better in a rising rate environment?”

BlackRock agrees that stocks are the way to go under these circumstances.

And within stocks?

“Indeed, global dividend stocks offer a compelling potential of income and outperformance in rising rate environments,” they add.

Check out this chart from BlackRock with historical performance during rising rate environments.

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