5 Effects of Low Interest Rates (What I Need to Know)

The once cyclic nature of interest rates has been altered in the post-Great Recession world, and the Federal Reserve will not allow the country to experience any more pain than necessary due to the COVID-19 pandemic. And while it appears the Fed is in no hurry to raise rates in the foreseeable future, investors should be aware of these 5 effects low interest rates will have on their investment decisions moving forward.

Bank accounts, CDs, bonds

Cash is a typical component of a balanced and diverse portfolio and, for many, a comforting haven in times of uncertainty. And although one of the stated goals of the Fed in keeping interest low is to prevent inflation from expanding, cash yields run the risk of a negative return; e.g. a 1.5% return with yearly inflation at 2%.

Stock valuations

Stock valuations are approaching a 20 year high, which seems contrary to what is occurring in the world. However, the real concern is that many stocks are trading at more than 20 times their earning estimates for the next 12 months. A question is whether the growth from the anticipated economic rebound will allow the earnings to catch up.

Government debt

Although the government debt now exceeds $27 trillion and is expected to surpass $30 trillion in 2021, the cost of servicing that debt has not increased dramatically in recent years. Despite growing deficits, interest remains low but is projected to rise dramatically by 2026.

Mortgage rates

It’s almost certainly true that there is only one direction for mortgage rates to go, but the questions are when and how high. If the economy recovers as we dig ourselves out of the pandemic quagmire, rates should edge up, but more bad news could alter that scenario.

The dollar

Increasing budget deficits and near zero interest rates do not bode well for the strength of the dollar, and neither seem to be going away any time soon, which portends even further declines

We understand uncertainty can seem an anathema to the investor, but our experience, training and skills can provide well-informed strategies to keep you on track to achieve your investment goals in any economic climate. Contact us today. 

Disclosure

The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.

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