<iframe src="//www.googletagmanager.com/ns.html?id=GTM-PFR3SFR" height="0" width="0" style="display:none;visibility:hidden">

Market Commentary: Rising Interest Rates Create Volatility and Opportunity

Oct 03, 2022 | Billy Fort


Share

The Federal Reserve's recent action of raising interest rates to help curb inflation has created volatility in the markets, generating opportunities in the equity market and making bond investments more attractive

Advisor talking with clients

The first nine months of 2022 have been extremely painful for all investors. The Federal Reserve has embarked on a path to reduce high-flying inflation, and their main approach is to heighten the overall level of interest rates. Such a move has sent large ripple effects across the investing universe that include the following:

  1. Risky investments have been routed. The “hottest” investments over the past few years – cryptocurrencies, meme stocks, SPACs, etc. – have lost significant value. These investments were built on a hope that was analogous to gambling. Market speculators have had their day of reckoning.
  2. High-quality businesses have repriced. Rising interest rate levels affect the price an investor is willing to pay for a blue-chip company. This does not mean that a strong business will go bankrupt, stop paying a dividend, or reduce research & development. In fact, history dictates that high-quality businesses become stronger during difficult times; they can afford to make investments that weaker competitors cannot. We believe best-in-breed businesses will continue to have growing cash flows and increasing dividends in the future. Our investing philosophy – a rising income stream creates wealth over the long-term – remains in place. A volatile market should allow for opportunistic investment in high-quality companies.
  3. Bonds have once again become a viable investment class. For the past 15 years, our team has avoided longer-term bond purchases. The reason was simple: interest rates were so low that an investor could receive a better income stream by a stock dividend with the added benefit of long-term price appreciation. The decision has been appropriate considering the 15-year return of the bond index has been below 2.5% annually.1  However, the recent rise in interest rates has created a return to the “old normal.” We believe some investors are able to opportunistically purchase bonds once again.

We expect the market will continue to be very volatile for the remainder of the year. That does not mean investors should cower in the corner. Instead, investors should look for long-term opportunities and remember this famous quote from Warren Buffett: “The true investor welcomes volatility…a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”

Categories

Analysis

Disclosures

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.

 

1.  file:///C:/Users/dwas615/Downloads/ReturnAnalysis%20(1).pdf

 

 

 

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.