Buyers of 10-year Treasury notes are betting the U.S. Federal Reserve is not finished raising interest rates. That’s because the yield on the notes has kept rising even though Fed Chairman Jerome Powell has repeatedly and strongly suggested that the central bank is done raising rates. And usually, the yield on the 10-year notes stops climbing when the Fed is done hiking. I don’t expect the Fed to hike rates again, primarily because wages and inflation seem more or less under control. At their current levels, interest rates are exerting a great deal of downward pressure on the economy and inflation. However, at least two Fed members recently suggested the the central bank may have to raise rates this year. So just in case that does happen, causing market rates to jump, here are three stocks to avoid if interest rates keep rising.
Bank of America (BAC)
Bank of America’s (NYSE:BAC) paper losses on its massive bond holdings have once again likely risen above $100 billion. The bank’s losses on its bonds rose because bond value drops when interest rates increase.
Barron’s noted that “Bank of America’s paper losses on the held-to-maturity portfolio don’t depress its capital or affect its earnings.” And the publication stated that the bank intends to hold its bonds until they mature. Meaning, the paper losses will never turn into actual losses. That’s because bondholders are always repaid 100% of their initial investments when bonds mature unless the borrower that issues the bonds default.
Still, many on the Street won’t be happy about buying the shares of a bank whose balance sheet is rapidly deteriorating. As evidence of that point, consider that BAC stock tumbled about 30% last year, largely due to worries about its balance sheet as interest rates climbed.
Finally, like all banks, BAC’s credit card charges are likely to climb significantly if rates increase meaningfully.
PulteGroup (PHM)
Of course, houses get much more expensive when mortgage rates rise. And when houses get more expensive, it’s harder for homebuilders to find buyers for them. As a result, homebuilders’ top and bottom lines tend to drop.
In October 2023, PulteGroup (NYSE:PHM), one of the nation’s biggest homebuilders, said that it expected 8,000 home closings in the fourth quarter of that year. That is well below the 8,330 closings that analysts had anticipated. PHM reported that the negative effects of high interest rates were the main drag on its home closings. If rates climb again, the firm’s sales are likely to once again take a significant hit.
Also noteworthy is that, in 2022, when rates were rising for nearly the entire year, PHM stock fell a huge 20%. Such a scenario could easily play out again if rates climb this year, making PHM one of the stocks to avoid if that scenario materializes.
Tesla (TSLA)
Tesla (NASDAQ:TSLA) CEO Elon Musk has correctly pointed out that high interest rates have a significant, negative impact on auto sales. In fact, he summed up the situation very well. Musk said high interest rates reduce the consumer’s purchasing power on a vehicle by increasing monthly payments.
And, Tesla is already struggling significantly as its deliveries came in at 386,800 EVs last quarter. This was well below the 422,875 vehicles that it had delivered in Q1 of 2023.
Further, despite the recent struggles of TSLA stock, the shares still have a rather high forward price-earnings multiple of 57.5 times. As a result, TSLA could fall much further if rising rates further dampen the automaker’s performance. Until its performance improves, consider TSLA one of the stocks to avoid.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines