As Interest Rates Hit A Fresh High, Where Are Investors Parking Their Cash?

Updated on

Much like the months before, November has been off to a rocky start as the Federal Reserve raised rates by 75 basis points, pushing up the bank’s benchmark lending rate to the 3.75% – 4.0% range. This move comes ahead of the central bank‘s commitment to tame rampant running inflation which hit a fresh high back in June 2022 of 9.1%.

The aggressive monetary tightening has seen interest rates double since the start of the year when rates were still close to near zero. Now, as we start to approach the tail end of the year, Jerome Powell, Chair of the Federal Open Market Committee (FOMC) suggests that there is still a long road to go before the bank will seize further interest hikes.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q3 2022 hedge fund letters, conferences and more


With rates hitting a 14-year high, market reaction after the most recent announcement left the Dow Jones Industrial Average dropping by 1.7%, with the S&P 500 and the tech-heavy Nasdaq Composite slid 1.71% and 1.79%, respectively.

The reaction was relatively tamer than anticipated, though investors are worried that the coming months will post lower earnings as economic indicators signal worrying signs.

Aside from higher interest rates, US employers also added less-than-expected new jobs in September, with 263,000 new jobs added for the month, the lowest since April 2021.

Big tech earnings season has also been off to a rocky performance, seeing giants including Amazon (NASDAQ:AMZN), Intel Corporation (NASDAQ:INTC), Advanced Micro Devices (NASDAQ:AMD), EOG Resources (NYSE:EOG), and Stryker Corporation (NYSE:SYK) topping the list for posting the biggest earnings misses so far.

Wall Street has been buzzing in recent months over the potential of a looming recession, which has seen many pulling their cash from volatile positions, only to park it in well-performing assets that can cushion their portfolios.

“Investors and traders alike are uncertain about the new year, and many are pushing their cash into deep pockets that will present an opportunity for growth and performance throughout an upcoming economic downturn,” says a spokesperson for US Plus500, the global fintech firm, and trading platform.

Tumultuous economic conditions have left many no other option but to rapidly diversify their portfolios in the hope that sudden economic changes will not impact their performance in the long term.

While the coming months may present a whole range of new and different challenges, investors are now parking their cash in all sorts of interesting places.

Growth Stocks

Growth stocks are nothing new for investors who are looking for potential amid a bear market.

Despite some high-flying tech giants posting less than remarkable performance, several companies have continued to remain popular growth stock options as they show steady performance despite a broader economic slowdown.

At the start of November, Apple (NASDAQ:AAPL) delivered less than desirable earnings, though the iPhone giant is valued at more than Amazon, Alphabet, and Meta combined. Though analysts expected better revenue performance in several categories, Apple was still capable of delivering positive revenue for its iPhone sales which were up 10% for the same period last year.

Other parts of the business such as Mac revenue and wearables were both up 25% and 10% respectively, while iPad revenue sales slid by 13%. Apple is keeping up with the markets and pushing its performance despite economic uncertainty.

Another steady performer that has lured investors in recent months is the well-known eCommerce platform Shopify (NYSE:SHOP) which reported its revenue rose by 22% in Q3 from last year. Though the company also did manage to report a $1.2 billion net loss for Q2, there has been some strong growth in merchandise volumes and gross payment volumes.

Even coming down by 80% from its pandemic high, Shopify is continuously expanding and lifting its margins to hedge higher inflationary and operational costs. Though many similar companies can expand under economic pressure, Shopify continues to introduce new products as a way to expand its current network of services.

Aside from Apple and Shopify, stocks that could become potential growth stocks include MacroLibe (NASDAQ:MELI), Zoetis (NYSE:ZTS), Coinbase (NASDAQ:COIN), and (NYSE:BILL), among others. Roku (NASDAQ:ROKU) and Block (NYSE:SQ) are also experiencing some interest from investors.

Real Estate Investment Trusts

Though the burden of higher interest rates has priced out would-be buyers from the market, real estate could potentially be a safe place for investors to put their cash, especially in the light of a looming recession that could see the Feds have to bring interest rates back down again.

Investors tend to view the real estate market differently than consumers and potential buyers, but that’s because investors look for growth and long-term return from a portfolio diversification perspective.

While physical real estate in the perfect world is a hedge against inflation, investors are instead looking at REITs, as these present more upside potential in the long run, rather than a short-term solution or possible inflation hedge.

Real estate is also a tricky market, as prices continuously fluctuate and broader market performance can also hurt the price performance. Never mind the Fed's aggressive interest rate hikes, bearish consumer sentiment over the market can leave commercial and retail property prices sliding without warning.

Instead of running the risk, and while it could have its potential benefits, the current environment leaves minimal room for error.

REIT property magnets that provide better upside, and long-term growth through a possible recession are Rexford Industrial Realty (NYSE:REXR), Public Storage (NYSE:PSA), Prologis (NYSE:PLD), Agree Realty (NYSE:ADC), and National Retail Properties (NYSE:NNN), and Alexandria Real Estate (NYSE:ARE).

While these companies also perform amidst a volatile market and economy, they tend to provide better cushioning for investors that are not as eager to jump into the real estate game head first.

These companies also provide a different real estate or property-based service as opposed to residential rentals. Tapping into several industries, including telecommunications and communications infrastructure, healthcare, leisure, and self-storage, the mindset is completely different from what investors will find with a traditional residential property or other types of commercial leasing.

There’s a lot of consideration here, and in terms of potential growth, investors will need to seek the best performers, looking at past performance, and how their choices will present potential upside in case of a sudden recession.

Private Equity

There are a lot of ways individuals tend to view private equity, and while it may have its ups and downsides, it does come with a certain luster that’s not easily found somewhere else.

Although the stakes are somewhat higher than general public firms or investing in IPOs, private equity gives solid long-term performance that’s measurable against the backdrop of the macroeconomy.

On the one hand, investors may argue that private equity may have higher risk potential, especially when there’s talk of a possible recession. On the other, many feel that private equity delivers better performance and growth despite the economic downturn and that companies are more eager to invest in expansion near the end of a recession.

In recent years, private equity has become a popular choice for young rich Americans who have by now lost their appetite for the bearish market. In a Bank of America survey, it was believed that 25% of young individuals between the age of 21 and 42 with at least $3 million in assets suggested that private equity is one of the best growth opportunities for your portfolio. This is nearly 10% higher than older investors who oppose the high growth performance potential of private equity.

It’s like we said, there’s an upside and a downside to private equity and it all depends on which companies investors look to park their cash.

The Bottom Line

Markets have been in a frenzy these last couple of months, and heading into 2023, investors will need to have a solid game plan up their sleeve if they intend to outperform the bearish market.

Despite investors scattering in each and every direction due to the changing economic cycle, from soaring red-hot inflation to soaring interest rates, it will be crucial for many to park their cash in places that can shield them from a recession, and the potential of losing out in case of a sudden downturn.

With minimal room for error and a small margin for losses, calculating every step will help investors implement the right strategies that can help their portfolios remain steady and growing in the coming year.