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Market Commentary: Increasing interest rates translate to higher borrowing costs

Feb 08, 2023 | Billy Fort


Steadily rising interest rates have made borrowing more expensive. Those with high levels of debt may find themselves with less to invest for the future.

2022 was a difficult year for all investors. Virtually every investment class was in decline. The stock market ended the year lower by almost -20%.1  The bond market had its worst performance in decades and was down -13%. If our homes and offices had a ticker symbol, we imagine they would show a decline for the year as well. The culprit for such investor pain is simple: interest rates. The Federal Reserve raised interest rates at their most rapid pace in 40+ years in order to fight inflation. Financial markets, in turn, were left twisting and turning to adjust to this new normal.

However, this new normal will not be the same for everyone. Businesses, families, and governments will be separated by a four-letter word: debt. Those that drank heavily from the fountain of financial leverage will find it difficult to operate in the same manner. Higher interest costs will not allow those entities with too much debt to properly invest for their future. They will fall behind their peers who kept borrowing at reasonable levels. There will likely be a Darwinian separation of the haves and have nots – those that have too much debt and those that do not. The Ross Group’s first priority in reviewing any investment is to examine the balance sheet and financial leverage. We will automatically disqualify an investment if we deem the debt levels to be too high. We believe this practice will become even more important over the coming years.

We believe 2023 will be a year where this separation starts to hit home. There will be businesses, families, and governments whose debt addiction comes to light. Our team enjoys this Warren Buffett quote about borrowing: "If you don't have leverage, you don't get in trouble. That's the only way a smart person can go broke, basically. And I've always said, 'If you're smart, you don't need it; and if you're dumb, you shouldn't be using it.'" We will, once again, heed the advice of the legendary investor.