Q1 2018: Is the (Nearly) Free Money Era Over?
Nearly six weeks into the New Year, the question on most investors’ minds is: “What the heck happened to my stock market that essentially goes straight up!?!?” Well, there are many explanations for recent “market concerns.” They include: the economy is heating up, wages are finally growing, unemployment is super low, and the anticipated impact of tax cuts. But, these are all subplots to the main storyline to this sudden change in stock market volatility and subsequent decline… Interest rates!
Whether you have realized it or not, interest rates have been declining for the better part of 35 years! Arriving at a low where it would really be hard to go any lower. And now, with what looks like a sustainable growing economy, inflation should pick up which will force the Federal Reserve’s hand in raising interest rates.
You may be asking, all of that sounds good so why should I care if interest rates rise? Over the long-term, this is a correct point of view. Rising interest rates indicate a healthy economy, which is good for all of us. In the short-term, as interest rate increases (or the anticipation of) changes the nearly free money environment we have been living in for the past nine years, investors will begin to consider investments other than stocks. Bonds will begin to have higher yields, decreasing the volatility premium you get paid to invest in the stock market. Essentially, the question of where to invest your money becomes more of a question versus the free money era!
So, what is an investor to do as interest rates rise (or the increased likelihood of future rate raises)? If you are a long-term investor (like us), you sit back and wait for the discounts created by the short-sighted folks and then make some investments on the cheap. Yes, the stock market has had a great run-up (which will exasperate a decline), but we’ve seen this movie before. With a good economy that only seems to be getting stronger, rising interest rates are expected and we should all benefit from it over the long-term.