Global markets sold off last week, effectively erasing gains so far this year. This comes in the wake of increasing U.S. Reserve rates, to 2.25% from 1.25% a year ago. It’s not all doom and gloom, however, as increasing interest rates represent strong economic growth, as the U.S. economy needs less stimulus to survive. Also, technically speaking, there’s continued strength among domestic stocks (see below).
10 years ago, amidst the 2008 financial crisis, the Federal Reserve injected enormous amounts of money into the economy. A method used to stimulate growth was by lowering the Reserve rate. They lowered them to effectively zero. By raising them, for the first time to such a degree, this represents an emerging, sustained strength for the U.S. economy that no longer needs Federal intervention.
There are more reasons for caution overseas. Japan and most countries in Europe are maintaining an effectively zero interest rate policy, recognizing that they need to do more to stimulate their economies. The threat of global tariffs and a trade war with China will only slow the rate of global growth. The International Monetary Fund warned last week, that for the first time since the financial crisis, global growth projections are too optimistic.
When interest rates rise, bonds prices fall. In this environment bonds are almost guaranteed to lose money over the short-term. Technically speaking they are now in a bear market. Over the long run bonds and equities often demonstrate an inverse relationship. When bonds go down, equities go up. Last week both asset classes went down in unison; I don't expect this to be the case going forward. Basically, investors need to put their money somewhere, and as interest rates rise, people will move out of bonds and into cash and equities.
At Eureka Wealth Management, I help my clients navigate rising interest rates and look for areas most ideal to invest. I also help plan for the future and strategize on taxes. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.