After spending several years in a near-zero interest rate environment, a series of increases starting in early 2017 has risen the Fed Funds rate to nearly 2% today. This rise in rates is an indicator of things both good and bad: On one hand, it is a direct result of a strengthened economy. On the other hand, it serves as a warning of, and a deterrent to, inflation.
It brings tangible results for the consumer: deposit rates have increased (consider how Unitus’ Go Savings gives you some of the highest returns available today) and mortgage rates are on the rise (as well as auto loans, credit cards, personal loans and the rest). But what does it mean for our investment accounts and retirement portfolios?
When it comes to stocks, interestingly, history shows that the S&P 500 (to take an example of a U.S. Stock Index) has actually grown in value during periods of rising rates dating back to 1993. When rates weren’t rising, there was no strong correlation either way – sometimes the market rose like it did in recent history, other times it fell. We are left to infer that rising rates are a sign of a strong economy and thus good for our stock markets. However, eventually these higher interest rates tend to lead to a tightening of the economy and a subsequent drop in the stock market.
This ambivalence carries over to the bond market. One of the most commonly held understandings about bonds goes something like this: when interest rates rise, bond prices fall. Therefore, if I’m selling bonds, I will receive less value during a time of rising interest rates. While this statement is true, when it comes to bonds there is more variability than some realize.
Many considerations play a significant role in performance, including:
- the length of time until the bond’s maturity
- the credit quality of the issuer
- whether a bond is foreign or domestic
During periods of rising rates, most of us would prefer to have bonds that are:
- nearer their maturity (reducing interest rate risk)
- from issuers with better credit quality (decreasing likelihood of default)
- potentially from a foreign country (where their interest rates may be better, or their economy may be in a growth phase)
With interest rates in a very different place than they were two years ago, and with a stock market struggling to break the high marks set earlier this year, it may be a good time to consider whether your portfolio is still built to serve your financial goals in a new marketplace. It is always helpful to evaluate the diversification within your portfolio in order to help position yourself to ride out the upcoming phase of our economy’s cycle. To speak with an experienced advisor, call 503.423.8519 and we will be here to help you reach your goals.
Unitus Financial Advisors are hosting a seminar this August about How to Weather a Bear Market. RSVP to take advantage of strategies designed to improve future earnings and help ensure your retirement income lasts your lifetime. Register here today.
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Posted by: Todd Micciche
About the Author: Todd Micciche joined Unitus Financial Advisors in December 2015. A financial advisor like his father before him, he is driven by the positive change he helps create in the lives of his clients.
He earned his MBA at Portland State University and has built 14 years of experience helping clients reach their financial goals. He holds various FINRA securities registrations and is currently studying to attain CFP® certification.