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Answer:
Dear
BuyandHolder,
Rising
Rates
Rates
have gone up because the Federal Reserve Board felt
that inflation posed somewhat of an economic threat.
One way -- in fact "the" way to address that threat
is by boosting rates.
In
the May 3rd meeting of the Federal Open Market Committee,
the group that sets interest rate policy, members
voted to raise short-term interest rates by a quarter
of a percentage point -- to 3%.
This
was largely due to the concern about slower economic
growth, a growth hampered to some extent by higher
energy prices.
Note:
This was the eighth quarter-point interest rate increase
since June of 2004.
Inflation
Defined
Just
so you will know, the official definition of inflation
is a sustained rise in the prices of most goods and
services.
W.C.
Fields, known for enjoying a martini or two, had a
more personal way of tracking inflation. As he told
a reporter, "The cost of living has just gone up another
dollar a quart."
How
Stocks React
Although
during inflationary times individual stocks react
somewhat differently, there is among investors a fairly
common reaction -- and that is that as interest rates
climb, investors are attracted to securities with
concomitant higher rates, such as EE Savings Bond,
U.S. Treasuries, bank CDs, money market accounts,
certain REITs (Real Estate Investment Trusts), bonds
and bond funds.
Nevertheless,
you should be aware of the fact that there are certain
groups of stocks that actually tend to benefit from
inflation -- those that provide the necessities of
life. Regardless of the direction of interest rates
or the stock market, we still need aspirin, toothpaste,
toilet paper and soap. We can't forgo shopping for
food and beverages. We continue to need new eyeglass
prescriptions and contact lenses. In some inflationary
periods, people have been known to switch from hard
liquor to wine and beer. We also continue to take
prescription medicines, over-the-counter drugs and
vitamins.
Inflation
Fighters
Stocks
in well managed drug and pharmaceutical companies
as well as food and beverage companies are inflation
fighters. So are public utilities and most health
care companies.
If
the Fed continues to raise rates and if you subsequently
are thinking about shifting some of your money to
interest bearing accounts, you should consider putting
that money in short-term (not long-term) CDs and Treasuries.
Inflation, like all things economic, is cyclical.
You don't want all your money tied up and unavailable
to reinvest in the market.
Bottom
Line: If you are thinking of taking out a loan
-- to expand your business, to buy a house or for
some other purpose, you certainly will want to do
so sooner rather than later, in case the Fed raises
rates when it meets again.
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