The Federal Reserve may raise interest rates slightly this fall. But all in all, deflationary pressures, lower rates abroad and threats from a strong dollar do not portend sustained and significant Fed hikes.
After six years of economic growth, shouldn’t we be looking for a downturn? Not necessarily. Several indicators – interest rates, bank stocks and capital spending – give us reasons for optimism, for the time being.
Bond funds are not the place to be if interest rates start to rise in earnest. Unlike buyers of individual bonds, who can ride out the resulting value drops until their holdings mature, fund investors can get slammed. Their funds, which must routinely buy and sell underlying assets, suffer the full force of the price drop.
Everything in the world seems to conspire to keep the dollar’s value aloft. But will that persist forever? Of course not.
Higher interest rates are coming. That’s bad news for bond investors, right? Not necessarily. Such a widely held belief can beguile you into making mistakes with your bond holdings.
After several years of solid stock market returns, you may actually be less afraid of risk. Maybe you question your asset allocation and strongly consider more stocks and other supposedly riskier assets. When balancing the temptation of ballooning returns with prudent and tested patience, though, choose the latter.
Central banks now lord it over the world’s economy. That has led to a lot of distortions and could end up harming the very system they seek to help.
Historically, stocks rise in anticipation of interest rate increase, because these hikes usually signify a healthy and expanding economy. That likely will be the case now.
The price volatility of government debt worldwide is worrisome – among other things because it might result in failures of bond auctions that could harm global markets. Even scarier is the widespread use of derivatives to hedge the risk of this debt, meaning the fallout could be still worse should this insurance fail to pay off.
Since the financial crisis, when both stocks and bond prices took a pounding, the normal pattern returned: Stocks zig when bonds zag. That usually meant that trouble in the world tanked stocks and buoyed bonds, particularly Treasuries. Nowadays, though, stocks and bonds may end up trading places.