Navigating the Impact of Higher Interest Rates: Finding Safe Havens in Volatile Markets

The recent surge in interest rates has sent shockwaves through both the bond and stock markets, leaving investors searching for safe havens amidst the volatility. The yield on the 10-year Treasury note reached its highest level since 2007, driven by hawkish statements from Federal Reserve officials and planned issuance from the U.S. Treasury Department. This bond selloff has been further fueled by robust job openings, indicating a strong hiring market that may require the Fed to raise rates further to control inflation.

The impact of higher interest rates is being felt not only on Wall Street but also on Main Street. Lenders have witnessed delinquency rates rising to pre-pandemic levels as individuals have depleted their pandemic savings. The stock market has also experienced fear, with the Dow Jones Industrial Average turning negative for the year, and all three major indexes declining by over 1% in Tuesday’s trading.

Even traditional safe-haven assets like utilities have struggled in recent weeks. The Utilities Select Sector SPDR Fund closed significantly below its 50-day moving average, indicating oversold conditions. With limited options for investors seeking shelter during this upheaval, cash has emerged as one of the safest bets. Savers can now earn interest on their nest eggs, with money-market funds and high-yield savings accounts offering yields that surpass the recent inflation rate.

Ultrashort-dated Treasuries, with maturities between one and six months, have also gained attention as a safe haven. These Treasuries yield approximately 5.5% and have been favored by investing guru Warren Buffett, who has been steadily buying them for Berkshire Hathaway. Despite the downgrade of U.S. debt by ratings agency Fitch, Buffett remains confident in the U.S. dollar’s status as the world’s reserve currency.

For investors seeking alternatives to cash and cash equivalents, one strategy is to look for stocks that offer growth at a reasonable price (GARP). While yields on U.S. Treasuries have risen, they have not reached levels that would crush growth. A steepening yield curve and a more normalized economic backdrop can benefit GARP-like companies. Dennis DeBusschere of 22V Research has identified 19 companies across sectors that exhibit high value and growth exposure.

Although the current market poses challenges, there are still hiding spots for investors. It is crucial to consider the macro backdrop for these companies while also evaluating any company-specific issues that may impact their prospects. Some of the companies identified include Delta Air Lines, United Airlines, American Airlines, Host Hotels and Resorts, Norwegian Cruise Line Holdings, Capital One Financial, Everest Group, Synchrony Financial, Comerica, McKesson, Viatris, Cencora, Target, Microchip Technology, Public Storage, XCEL Energy, and Targa Resources.

In conclusion, while higher interest rates have created turbulence in financial markets, investors can find solace in various options. Cash and ultrashort-dated Treasuries offer safety, while stocks with growth potential at reasonable prices present opportunities. It is essential to navigate the market with caution and consider individual company dynamics.