Quick Comment – Interest Rate Rebound Calls for Caution
Rarely is anything more clear that what’s been fueling the market recovery over the past 8 years: low interest rates.
It’s been good for most investment classes, including the stock market, real estate market and the bond market. In fact, all three of these major asset classes have been rising in concert since the extraordinary stimulus was first enacted in early March, 2009.
So what happens to asset prices when interest rates start to rise? Well since all major asset prices have been rising as rates were falling, it’s no stretch to think that they’d reverse trend when rates do start to rise.
And the intentions of the Federal Reserve to raise rates is the worst-kept secret on the planet.
Comments out this morning by Boston Fed President Eric Rosengren support the case for raising interest rates soon. Stating that commercial real estate prices adjusted for inflation “have risen quite rapidly over the past five years, especially for multifamily properties” Rosengren makes the case that rates can’t stay low forever, and that future market deterioration may be unavoidable.
So just like in 1999 and in 2007 it’s important to remember that this current expansion has been fueled by one factor (low interest rates), and if you take away that one factor the environment changes dramatically. Our general advice (especially for investors nearing retirement) is to overweight in risk-managed, flexible strategies – we believe it’s an historic and often-repeated mistake to overweight in risk-accepting strategies near market tops.
I’ll be writing more about this next week, and how we’ve prepared for the three most likely paths for the markets moving forward. Stay tuned!!