What Rising Rates ACTUALLY Mean For Your Investments

00:00 - Intro
01:40 - Rate hikes explained
02:30 - Impact on fixed income
03:16 - Impact on stocks (theory)
05:21 - Stocks that do best/worst
07:10 - What actually happens
09:37 - Gold and crypto
10:30 - The takeaways
12:19 - Sponsor

We all generally understand that interest rates are bad for stocks, but according to historical data, things aren't as straight forward as you'd expect. We dive into the relationship in today's video

DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice - Richard is not responsible for investment actions taken by viewers. Please seek out a registered advisor if you require assistance (while Richard is a registered portfolio manager at WDS Investment Management, he does not provide advice through The Plain Bagel, which is not affiliated with his employer).

[alexandercallender]

Here just early enough where I think you'll get this.

You're great at what you do, keep it up! You are by far my favorite YouTube personality on finance and I truly appreciate the hard work and hours you put into this channel.

[jiangalang]

YES just the video I was waiting for. I've been so confused about the effects of inflation and rate hikes. Really appreciate your balanced and clear-headed take.

[brenobarbosa]

This ended up being a lesson on the difficulty of causal inference with time series data. There are leads and lags, confounding variables and the like making any sort of serious casual inference an intricate and restricted task

[laina-brown]

They were kind of talking about this in the book the psychology of money. Every generation grows up with different economic circumstances. This leads each generation to often have different views about money.

[WingofTech]

One of the best parts about investing in a rising rate environment (or the break down of stocks beforehand), is that it hits P/E’s across the board, even companies that are very high-quality.

[Frankcapasso]

Richard you are terrific at educating people in plain (bagel) language.

[SeaCowg]

Everything you said is factually correct, but it doesn’t take into account the add-on effect of the Fed reducing the size of its balance sheet at almost the same pace as they expanded it. The Fed has the luxury of printing as much money as it wants to do meet it’s goals but the real economy has no such counter when the Fed decides to reduce money supply. Liquidity WILL dry up and something is gonna break. Also, the Fed itself has admitted that one of their goals is to reduce stock prices (the market is too expensive). If that’s one of their stated goals, why fight them on it? Don’t fight the Fed.

[jfjoubertquebec]

I like the fact we can watch an "old" video and still have it be relevant.

[christianng]

What I found super interesting how investors had priced in the initial March fed rate hike well in advance (ARKK Invest, Alibaba, Tencent as examples all dropped by >60% off the highs), and then rebounded strongly as soon ad the first rate hike occured. So in theory, now is a good time to invest even in tech until the Fed finally decides to cut rate again.

[OopsFailedArt]

Excellent break down. Great job keep it simple too. This may the best break down I’ve seen especially in terms of understanding.

[samsonsoturian]

It means DON'T get a floating rate loan.

[PlutoTheGod]

Just wanted to thank you for being one of the only channels on YouTube who actually understands the world of finance & what they’re explaining to their audience and isn’t running any game or scam on anyone.

You and Patrick Boyle are really the only two I’ve seen who explain things throughly, simply & truthfully. This site has gotten to the point where it’s basically a minefield of pumpers and course sellers who most of the time aren’t even knowledgeable on what they’re “teaching” trying to strip money from all their viewers.

[legobasemaker]

Hi Richard, I love your videos and I am currently writing my dissertation on how social media can influence financial literacy and investor behavior, and I would really appreciate if you could spare 20-30 mins for an interview for this project. Thanks in advance and keep up the good work, Adorján

[jbbentley]

Companies took advantage of low interest rates and cheap money after the GFC to boost the bottom line but now that it’s drying up what will come of stock prices? If bonds are getting slaughtered doesn’t that equate to liquidity drying up?

[marcelduda]

Rates didn't fall because of the pandemic. The fed cut rates starting in 2019 because the market couldn't take quantitative tightening. Which still hasn't begun to this day btw

[lincolngaffney]

Hey Plain Bagel you should do a video on stock splits and how they work with big companies like Google, Amazon and Shopify starting to do splits.

[MrSupernova]

Good video on the theory and technical aspects of interest rate hikes. However, the rate hike is only part of the story and I would argue that the bigger factors affecting the economy, and as a result the markets, are inflation and the war in Ukraine.

My takes:

1) The most recent US CPI inflation rate was 8.5% far above the Fed's 2% target. Clearly, the Fed is already far behind the curve on this inflationary cycle and one thing you didn't discuss was the velocity of the rate hikes. Sure, if the Fed only increases rates by .25% at a time then the impact on the market will be less pronounced than if they increased rates at .50% or higher. But then, what happens if the Fed continues dragging its feet and inflation keeps rising?

2) The war in Ukraine is adding more inflationary pressure globally on food and energy prices. Central banks might not be able to mitigate inflation with traditional tools which might lead to a recessionary period regardless of what the central banks do. The question might not be whether we enter an economic downturn but whether we have a crash landing or a soft landing.

3) I believe much of the middle class is being squeezed financially as much as they can handle due to insanely high (overvalued?) housing costs and inflation. Let's face it, a large portion of middle class people can no longer afford to buy a house because housing costs over the past twenty years have far outpaced wages. This means that millions of middle class people are one emergency away from a financial catastrophe which could bring down the entire house of cards down similar to 2008. For perspective, there were 2.3 million foreclosures in 2008.

4) Let's not forget that part of the stock market's gains over the last few years, at least in the USA, are due to Trump's efforts to get re-elected. Remember that Trump passed one of the most comprehensive corporate tax breaks in decades and pressured the Fed to lower rates in 2019 because Trump is a "low interest rate guy." We could argue about how much influence these policies had on the market but its undeniable that they contributed to higher market valuations.

5) During the pandemic we saw governments dump trillions of dollars into the economy. The effect was that the (US) market doubled from 2020 to 2021. If that doesn't scream overvaluation then remember that during the pandemic consumer spending and commercial activity dropped dramatically. In fact, in the US we had two consecutive quarters with negative GDP growth. Some industries got decimated and who knows many many thousands of businesses closed their doors permanently. The Fed estimates that 200 thousand small businesses in the US closed permanently due to the pandemic but the real number likely much higher.

In conclusion, I think its very possible that we're sitting on the largest bubble we've experienced since at least 2008. It only takes one segment of the market to pull down the house of cards that the market is currently sitting on. In one scenario, perhaps, we don't have a full blown recession similar to 2008. However, I think its very likely that the (US) market is still very much overvalued and we will enter a recessionary period of some sort within the next 12 months. In pre pandemic 2020 the S&P 500 was at 3, 380. Today, almost exactly two years later the S&P500 is at 4, 400. This means that the stock market experienced a 33% gain in the middle of a pandemic while commercial activity and consumer spending took a massive nosedive. I would ask how is that possible but we already know the answer. Lastly, let's be honest, if the US goes into a recession we're likely to bring down much of the first world with us due to our global economic influence. We'll see where all this leads but I wouldn't be too optimistic about market performance over the next couple of years.

[chemquests]

No change to my investing strategy. With multiple decades to go, just ride through the ups & downs, taking advantage of dollar cost averaging. In the long run the market will go up. Don’t chase trends; average investors underperform because of too much movement.

[ricruss]

In times of inflation buy quality stocks. Companies that have good cash reserves that can weather the turmoil of an inflationary environment. Stay away from start ups in these times.

[slovokia]

As a general principle assets that produce real income streams (ones that tend to keep up with inflation) should probably be discounted by real interest rates while assets that produce nominal income streams should probably be discounted by nominal interest rates. Nominal interest rates can rise while real interest rates stay low. A transition to a monetary regime of higher inflation would tend to hurt long term nominal bonds more than stocks.