Let's Talk Interest Rate Risk
The chatter you will hear as we advance ahead is around interest rates and their effect on the economy. If you think back to 2008, It feels as if we came out of the excellent mortgage recession rather quickly, partly due to the lowering of interest rates. People were able to refinance and lower their costs on their mortgage, automotive loans, and many other aspects. Many also took cash from their home's equity to remodel, pay down debt, or purchase other loan-based goods. So, what does this do to help our economy? Consumers spend money when there is more of it, and when it goes on sale (low-interest rates), people want to use it to their advantage.
For clarity on how this all works, let me explain a little further. Interest rates from the fed help set the interest rate environment for the entirety of the US monetary system and partly the world. Money moves between the banks and feds, and when the feds loan money to the banks at a specific rate, it sets the tone for other markets, including the value of our dollar. Due to the world reserve currency being the US dollar and our ever-expanding globalized economy, all eyes are on us again. Many other countries around the world own treasury bonds from the US, which will fluctuate with interest rates, making it the most powerful interest rate globally.
Before the pandemic, we started seeing a slow uptick in interest rates as a means to get back to a "normal" interest rate environment. It was long overdue, but the fears of rising interest rates and their adverse effects on bond yields put pressure on the fed to keep things status quo for too long. Interest rates went back down quickly back to where they were more than 10 years before COVID-19 showing its face to this world. Shortly after the fear subsided, you saw droves of people looking at their mortgages and other loans again. Here we are again refinancing, pulling equity for remodels, and taking advantage of other purchases' low interests. This shows we learned a thing or two from 2008…when life gives you lemons, make lemonade.
So, what does all of this mean for you in today's interest rate market? The lowering of interest rates drives the economy to spend, increasing revenues and showing well for the stock market, which boosts our overall economy. Now that we are getting past this recent market downturn, the interest rates will inevitably need to start coming back up. When interest rates rise, it tends to have a negative impact on the market as lending costs increase and bond pricing can be negatively affected. But, let's look at history to helps us understand what may happen going forward.
1. Historically, the S&P 500 index has advanced during extended rising rate periods by almost 80%.
2. The S&P 500 index has tended to perform better in rising interest rate environments when
- The starting point of rising rates was low, as it is this time (check!)
- We are not in an extended period of high inflation which we are well clear of (check, again!)
- Rising interest rates are accompanied by strong yield curve steepening, which we have been seeing (triple check!)
Overall, positive signs are showing that stocks will hold resilience to a current rising interest rate environment. Time is in our favor as long-term investors if we stay resilient and focus on our goals.
Take care for now, and as always, I'm here to help you navigate your goals.
*Content in this material is for the general information only and not intended for provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
*All investing involves rick including loss of principle. No strategy assures success or protects against loss