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Market Commentary: The End of "Free Money"

Jan 21, 2025 | Billy Fort


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Low interest rates over the last 15 years have kept borrowing costs low. However, as interest rates have risen in recent years, borrowing costs have increased, but so have fixed income investment opportunities.

US flag and skyline

The era of “free money” appears to be over. During the 15-year period from the financial crisis through the pandemic, borrowing costs in the United States were historically low. This low-rate environment was due to Federal Reserve policy coupled with minimal inflation. However, interest rates began moving higher in 2022 to combat elevated inflation levels brought on by the pandemic’s effects. Market prognosticators assured us that higher rates would only be “temporary” while we dealt with inflation levels as high as 9%1.   As with most market predictions, this forecast has been wrong. Inflation currently sits at roughly 3% 2, but interest rates remain elevated near 20-year highs. The Ross Group believes investors need to adapt to an interest rate world that is very different than the past decade and a half.

Higher interest rates mean the following for investors.

  • Investors now have more choice to seek an income stream. For years, owning bonds and other fixed income investments was a poor option; stocks were the only game in town. Now investors can be rewarded with a return above inflation through bond ownership, which provides competition to the stock market.
  • Investors need to be aware of the balance sheets of their equity investments. Stockholders need to account for the debt held by their businesses because increasing interest costs can put pressure on long-term business stability.
  • Everyone needs to look at their own personal borrowing. Many became addicted to low borrowing costs and assumed they would never move higher. The reality of higher interest costs will hit many who thought low rates would be with us forever.   

This “new normal” of interest rate levels is not necessarily “new” – it is really a return to the interest rates which investors experienced before the financial crisis. But for those who are younger and those who thought low rates would be here indefinitely, this is a shock. Our team is prepared to help navigate through this changing environment, and we are happy to help. As Warren Buffett once said, “Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe."

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Disclosures

https://www.reuters.com
https://www.usinflationcalculator.com/inflation

The views presented herein are solely those of The Ross Group and do not necessarily represent the views of RBC Wealth Management. The current status of issues discussed in this article is subject to change based on market conditions and industry fundamentals. Clients should work with their Financial Advisor to develop investment strategies tailored to their own financial circumstances. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

Steve Ross, NMLS # 1627972 through City National Bank, may receive compensation from RBC Wealth Management for referring customers to City National Bank. Banking products and services are offered or issued by City National Bank, an affiliate of RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC and are subject to City National Banks terms and conditions. Products and services offered through City National Bank are not insured by SIPC. City National Bank Member FDIC.

Investment products offered through RBC Wealth Management are not FDIC insured, are not guaranteed by City National Bank and may lose value.