Blog Article

What Do Rising Interest Rates Really Mean for Your Investments?

Paresh Kamdar

By Paresh Kamdar, Wealth Advisor CFP®
Published On 12/12/2023

Recently, I was out on a beautiful fall mountain bike ride with a friend who also happens to be a client. As we rode the trails, we chatted about topics of all sorts and eventually wound up on the current state of the market. He works in internet security and is very excited about the improvements he sees in fields like medical science, atmospheric science, and environmental science – all driven by AI. But he wondered how stocks could be expected to grow with the rising interest rates we are experiencing since stock values take into account expected profits, which will be worth less because of higher rates and higher borrowing costs. He is correct on both accounts, yet I personally remember interest rates being this high and higher – yet markets grew handsomely. Economic growth was strong in the 90s despite the high rates.

Around 2001, when my wife Sibylle and I bought our first home, earning 5% on CDs and money market funds was considered normal. We were pretty happy that mortgage rates had come down to 7% when we locked our rate! It was much better than what my mom and dad had experienced, paying over 10% for a mortgage on a home they purchased in 1989.*

Historical Market Performance

I remembered that markets grew tremendously over this time, but I did have to ask Siri for the specifics when we took a break at the top of our climb. The S&P 500 closed at 353.4 at the end of 1989, when my folks bought a home, and 1,320.28 at the end of 2001, when we purchased our first home.** Today, as I recount these memorable milestones, the S&P 500 is at 4,550.0. Talk about tremendous growth of markets! Now, this is just anecdotal – and to be fair, it includes the very low interest rates over the last 10 or 15 years.


Source: https://www.macrotrends.net/2324/sp-500-historical-chart-data

Investment Strategy in High Interest Rate Environments

That day, after we wrapped up our ride and I was back home, I became curious about what history can teach us about the impact of higher interest rates on stocks and bonds. I found data studies concluding that stocks have provided a substantially greater return over treasury bonds in low- and high-interest-rate environments and that small-cap stocks have performed especially well in higher-interest-rate environments.

In fact, the Dimensional study shows that in the years with above-average interest rates since 1955, when short-term treasury bonds averaged 6.7%, U.S. stocks returned an average of 12.1%. This is slightly higher than the average return of 11.6% in below-average interest rate years. Interest rates are just one of many factors reflected in discount rates for future cash flows. Markets are far more complex and have historically grown during both high- and low-interest rate environments.

As you contemplate your investment strategy in these dynamic times, it’s natural to have questions and seek personalized guidance. Our team of experienced wealth advisors is here to help you navigate these complexities and tailor a strategy that aligns with your financial goals. History has shown us the importance of maintaining a diversified portfolio, and our advisors can provide you with the insights and expertise needed to make informed decisions.

We invite you to take the next step toward securing your financial future. Schedule a free, in-depth consultation with one of our wealth advisors. Let us partner with you to create a customized plan that addresses your unique circumstances and aspirations. In a rapidly changing market, having a knowledgeable ally by your side can make all the difference. Don’t miss out on the opportunity to explore your financial potential – contact us today for a consultation that could pave the way for your financial success.

Sources:
* https://www.bankrate.com/mortgages/historical-mortgage-rates/#summary
** https://www.macrotrends.net/2526/sp-500-historical-annual-returns

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

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Paresh Kamdar

By Paresh Kamdar, Wealth Advisor CFP®

Paresh has a zest for life that embraces the idea of challenge. He will tell you he enjoys skiing, climbing and backpacking but sometimes forgets to mention the helicopters, high-altitudes and going “off-grid” that are often part of his adventures. Humble to the core, this West Virginia native is not afraid to dive in and explore. Whether mountain biking with friends or helping a client explore retirement possibilities, Paresh offers hands-on expertise and wisdom with enthusiasm.

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