To The Moon

$AllianceBernstein Holding LP(AB)$

$Ares Capital(ARCC)$

In March, the Federal Reserve raised benchmark interest rates for the first time since 2018. And in the intervening weeks, Fed Chair Jerome Powell has been increasingly clear that even higher rates may be on the way soon. That has investors scrambling to scrape up the best stocks for rising interest rates.

Speaking on March 21, Powell said the central bank will move "expeditiously" and "more aggressively" towards higher interest rates. That has left little doubt in the minds of many investors about what's in store for the markets in the coming months.

To be clear, rates are still relatively low even after all this. The effective federal funds rate now sits at 0.33% instead of 0.08% prior, but that's not even within earshot of rates from prior decades that were several full percentage points higher.

Furthermore, rising rates should never be seen as a death knell for the economy. In fact, the presence of rate increases is because the Federal Reserve sees inflation as a bigger risk to the U.S. economy than the burden of higher borrowing costs. If businesses and consumers weren't churning along, there would be concerns of how these rate hikes would be absorbed, keeping Powell and other policymakers in check.

There are certainly changes that are afoot as a result of higher interest rates, but investors should not make the mistake of thinking these moves means you should abandon the stock market entirely. Indeed, several of the best stocks for 2022 had the potential for rising rates on the mind, and today, we'll be looking at a few that are tailor-made for this environment.

$AllianceBernstein Holding LP(AB)$

An iconic name in asset management, AllianceBernstein (AB, $47.83) is among the best stocks for a rising-rate environment for a number of reasons.

Most obviously, the financial stock has roughly $780 billion in total assets under its belt, meaning a modest rise in rates means it can put idle cash to better use in interest-bearing assets.

And with a best-in-class fixed income division that might be in demand as investors look to navigate the current environment, these tailwinds are sure to benefit AB shareholders.

It's also important to note that a rising-rate environment also will create more volatility generally in capital markets as Wall Street reshuffles its priorities. That is normally a good thing for elite firms like AB, both because it provides opportunities for its shrewd managers to cash in and because many high-net-worth investors tend to start shopping around for firms like this one to get ahead. Furthermore, the institutions that use AllianceBernstein – including estates, government agencies, charitable organizations and corporations – are going to be asking for advice and insights now more than ever.

AllianceBernstein has also used M&A over the years to improve its offerings. For instance, it made headlines in March by announcing the acquisition of a global private alternative investment manager, CarVal, for $750 million as it expands operations. And in 2019, it also picked up fintech firm Autonomous Research to better diversify its revenue stream and bolster its research operations.

$Ares Capital(ARCC)$

Ares Capital Corporation (ARCC, $21.35) is a business development company, or BDC. This kind of stock is a bit like a publicly traded company that operates as a private equity firm, offering investors a way to pool their resources and take advantage of targeted opportunities that ARCC thinks will deliver outsized returns.

Specifically, Ares Capital engages in acquisitions, recapitalizations, restructurings and "rescue financing" of mid-sized companies that typically are between $20 million and $200 million in market value. In other words, these are Goldilocks companies that are neither too small to be meaningless nor too big to be able to access capital markets in a way that an entrenched blue-chip stock could.

Particularly interesting is the so-called "unitranche" structured investments where Ares goes all-in to be the first and only lender, giving it a powerful seat at the table when it comes to negotiating with management or ensuring its loans are paid in the event of a default.

With a rising-interest-rate environment, obviously Ares can command higher returns for the loans it offers midsized firms. And ARCC stock has outperformed the broader S&P 500 year-to-date as a result, up marginally versus the index's nearly 5% loss.

Plus, the company offers a best-in-class quarterly dividend of roughly 8% after a recent bump to 41 cents a share – sign that this company is dedicated to sharing its success with its public stakeholders.

When you add all of that up, it's easy to see why ARCC is one of the best stocks for rising interest rates.