Stock Market Insights: Why rising interest rates aren’t scaring investors this time
Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.
After six weeks, I am finally getting rid of my sling after rotator cuff surgery. I have mixed feelings about it. While I look forward to more mobility, I am also a little afraid I might do something to reinjure myself. The market feels about the same to me right now; a few real concerns, but overall great days ahead.
The Federal Reserve (Fed) raised rates for the first time in three years; bond yields are at their highest level since 2009, and Treasury yields are also near recent highs. Usually, surging interest rates will get seasoned investors nervous, but I’m not seeing that this time.
I am not saying professional investors are thrilled, but I am sensing excitement about market opportunities that I hadn’t expected. Usually during times like these, investors see rising rates as a sign of higher borrowing costs, higher inflation and a drag on stocks. In the past, several investors have worried that higher borrowing costs would hurt corporate profits and slow the overall U.S. and global economy.
What is different this time around?
We're at a unique time in the economy: First, most Americans have locked in low mortgage rates and aren’t affected by rising rates. Second, the biggest corporate borrowers lately are artificial-intelligence (AI) companies with plenty of cash that also aren’t susceptible to higher interest rates. It’s been interesting to watch how the Magnificent Seven used to steer the market, but now AI-related companies are powering the U.S. economy. It looks like they are going to keep spending, which is another reason investors expect continued growth.
It’s not all sunshine and fairy dust for every part of the economy.
Some parts of the economy remain interest-rate-sensitive and will struggle. Housing and commercial real estate are chief among them and are feeling pressure. I think they will likely remain under pressure for the near future.
Oil prices are still too high. When oil gets pricey enough to slow down consumer spending, it can slow the economy. Thankfully, the U.S. isn’t as susceptible to high oil prices as it used to be because the U.S. produces more oil than it needs. Higher energy prices aren't necessarily the biggest concern, but they do lead to higher inflation because it costs more to ship goods. This leads the Fed to raise rates, which is the financial cycle of life.
Bond investors are saying, “Yield, baby, yield!”
The biggest bond investors love this rising rate environment. That is because for the first time in years, you can buy high-quality bonds at higher interest rates. You can get higher yields without dipping into the junk bond category and getting yields in the 6-7% range. The downside is that higher interest rates push bond prices lower, but for income investors, this is a breath of fresh air.
I got my first investment license thirty years ago this past spring. Over the years, I have learned that there are always opportunities to add value to portfolios; you just have to find them. Another thing I learned is that over the long term, it’s the fundamentals- revenues, net income, profit margins and cash flow- that drive markets, not news headlines.
Some parts of the economy are concerning and could cause some slowing, but I don’t see a recession anytime soon outside of a major terrorist attack. Overall, I feel good about the market for the rest of the year. Whatever is ahead, I still believe that a diversified portfolio is the best tool for navigating unexpected twists and turns in the market.
Since I can’t hike or play golf, I have been doing a lot of home chores. Last weekend, I went through our tax returns and receipts from the late ‘90s, which were overdue to be shredded. Three hours into sorting boxes, my injured shoulder started hurting terribly. I had been using the hand from the injured shoulder to take the paper and drop it into the shred box on my right side. That small use set me back a few days in rehab, which is why I am a little concerned about taking off the sling. I just have to tell myself not to believe the fears and trust that better days are ahead. I believe that for my shoulder and the markets.
Have a blessed week.
This article was written by humans for humans because AI doesn’t have this quality of sarcasm.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
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