The Motley Fool

With interest rates set to rise, is a stock market crash coming?

Businessman looking at a red arrow crashing through the floor
Image source: Getty Images.

It looks as if the Bank of England will move to increase interest rates in the next few months. Nothing is guaranteed. But based on recent rhetoric, analysts reckon the central bank could hike rates before the end of the year, or in the first half of 2022. Unfortunately, there is a chance this could spark a stock market crash. 

Plenty of risks 

Over the past decade, equity markets worldwide have chugged higher thanks, in part, to low interest rates. These make it more appealing to borrow money to invest and can push up company valuations.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

With consumers earning almost nothing on their money in savings accounts, many have also turned to equities searching for a better return. If interest rates rise, these investors may not stick around. 

Higher interest rates could also cause stress in the economy. Indebted companies may struggle to meet higher interest charges. This could lead to an economic slump, which would be bad news for stocks. 

Put simply, there is a range of different risks that could cause a stock market crash after an interest rate hike. The bad news is, it is impossible for me to say at this stage if a rate hike will cause a crash. Trying to predict the future direction of stock markets is a fool’s errand. And it can be downright dangerous if money is at risk. 

Therefore, the approach I am using to protect myself against the potential market crash is diversification. 

Stock market crash protection 

I have acquired stocks for my portfolio that should continue to prosper, no matter what the future holds for the macroeconomy. These include corporations like Diageo, which have stronger balance sheets and will be able to pass higher costs on to consumers. Although, due to the company’s association with alcohol, it may not be suitable for all investors. 

Companies like Rio Tinto may also provide protection against higher rates. This firm has a strong balance sheet, and commodity prices should match inflation in the long run. That said, commodity prices can be incredibly volatile. So, there is no guarantee the group will be able to escape any economic turbulence. Still, I would buy the stock to diversify my portfolio. 

As well as acquiring these companies, I would also avoid businesses that may struggle in a higher rate environment. A great example is SSP Group.

This foodservice group entered the pandemic with a weak balance sheet and suffered as most of its outlets in airports and railway stations were forced to close. It could continue to struggle if rates move higher. That said, if the economic recovery continues to gain traction, the stock’s recovery could accelerate as well. 

By using the above investment strategy, I think I will be able to avoid the worst effects of a stock market crash if one does occur. If not, I think the high-quality businesses outlined above will continue to perform. 

Free Report: 3 Shares To Try And Hedge Against Inflation

The Bank Of England has acknowledged that inflation is likely to peak above 4%, and stay there until the second quarter of 2022.

Some people are running scared, but if there’s one thing we believe you should avoid doing at all costs when inflation hits… it’s doing nothing.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation.

Because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

Rupert Hargreaves owns shares of Diageo. The Motley Fool UK has recommended Diageo and SSP Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.