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."