Co-Navigating the Rising Interest Rate Environment
Seldom is the winter wind blowing under 50 mph, and weekly over 100 mph, at Edmund’s Col (‘the winter Col’), found in the White Mountains of New Hampshire. Sound counsel for climbers contriving a first-venture through ‘the winter Col’ is a preceding and critical adjustment in both attitude and posture. Investors navigating a rising interest rate environment may be confronted by similar headwinds; hence, comparable preparations are advisable. What are the financial implications of rising rates, and what adjustments should you consider making?
America’s central bank (‘the Fed’), in response to the 2020 Covid-19 lockdown, unleashed the greatest money-printing experiment in world history, pushing inflation to fresh 40 year highs (so far). Shocked that inflation didn’t prove “transient”, as it proudly insisted throughout last year, ‘the Fed’ is now panicking to bring the inflation it created back under control. One of the means available to ‘the Fed’ in accomplishing this task is to raise interest rates, which restricts loan growth, which dampens business and consumer spending, which slows the economy, which reduces inflation.
The following are potential implications of rising interest rates, and keep in mind some of these effects are delayed:
Higher loan costs
Less corporate and personal borrowing
Decreased corporate and consumer spending
Higher mortgage rates
Decreased demand for real estate
Declining home prices
Increased interest rates on fixed income accounts
Decreased demand for stocks
Rising interest costs on government debt (a 2% increase in rates, forecast by 2023, will increase government interest expenses by $750 Billion annually!)¹
Higher tax rates to fund government debt
Prudent re-posturing might include the following:
Be attentive to re-positioning short-term and emergency savings to higher interest rate accounts.
Convert variable rate debt to a fixed rate, and better still, pay it off!
Own fewer speculative stocks, especially non-dividend paying stocks.
Diversify income sources creatively by engaging the charter economy (December 17, 2021 blog).
Creatively cut household expenses by engaging the alpha strategy
Avoid over-reacting to the new rate environment. Stocks have historically risen during the early and mid-rate hike cycles. Don’t hide in bank accounts, as they are still losing purchasing power at an alarming rate. Carefully think through each financial issue.
Avoid low quality debt and long-term bonds like the plague.
Avoid deferred payment plans and unnecessary consumer debt.
Think about it, Shaun.
“Wealth gained hastily will dwindle, but he who gathers little by little will increase it” ~Proverbs 13:11
1 Dr. Eifrig’s Health & Wealth Bulletin, “What Higher Interest Rates Mean For You…If They Happen”, February 10, 2022
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
https://www.fivestarprofessional.com/spotlights/90982
Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.