Indicators of Rising Interest Rates and Effects on Your Portfolio
By Brian Frederick, CFP®, CIMA®
News last week of rising interest rates on the 10 year Treasury Bond (which influences mortgages and other loans) had the media in a frenzy. However, rising rates are not the bugaboo that some headlines would have you fear. While the one percent rise in a fairly short period of time can feel drastic, we are still at historically low rates comparatively. Interest rates can go up for a number of reasons, typically driven by one of two things: crisis or optimism.
A “liquidity crisis” is when there is not enough money in the system to lend. With near record amounts of money in the banks, the massive amount of mortgage refinances taking place, a booming national housing market, and still low interest rates, this is not a situation we are currently in.
Optimism in the economy can also drive up interest rates. The continued rollout of vaccines and a proposed $1.9 trillion stimulus plan making its way through Congress, people and businesses sense we are turning the corner on the worst of the pandemic and this has a stabilizing effect. As we have seen in years prior, rates typically rise in an improving and growing economy.
All of this begs the question: if optimism in the economy seems to be the indicator for rising interest rates, why did we see choppy market trading and a big sell-off on Thursday of last week? According to some professionals, stocks have been reflecting optimism about the economy, and now they are being joined by bonds. Fortunately, it should be a short-term tug of war and investors should realize we are now just getting back above pre-pandemic levels. With any further pullback, it is likely some sectors like tech and consumer discretionary (which have gained the most) will be affected more than others, so be sure to speak with your advisor and take a look at your portfolio to identify any opportunities to rebalance or adjust your holdings.
While we wait to see where interest rates stabilize, it’s important to remember a better economy is a good environment for investing. We should all continue to look at our goals and timelines and have our investments align with them. As I wrote in a previous post[1], don’t let headlines distract you. We will always look at spreading the investments around in a diversified portfolio, constantly looking for perceived value, and rebalancing along the way to help our clients accomplish their objectives through a variety of scenarios. As always, please reach out to your financial advisor with any specific questions.
Any opinions are those of Brian Frederick, CFP®, CIMA® not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results. Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.
