This quarter has been disappointing for investors, and volatility has continued. US small-cap, large-cap, and international stocks all declined. Bonds also went down. The rising interest rate environment that began when the calendar flipped from 2021 to 2022 continues to be the main driver of economic and financial markets.
On Wednesday, September 22nd, the Federal Reserve raised short-term interest rates by 0.75% to a target range of 3.00 – 3.25%. This move itself was not surprising, but the Fed has reiterated their commitment to raising rates in order to quell high inflation. Their next meeting is on November 2nd. Much like football fans looking forward to the next game, markets are anticipating where interest rates may go in the future.
Of course, no one knows for sure what will happen. However, certain outcomes are more likely than others. The following graph shows where the market expects the Federal Funds interest rate to be after the December 2023 fed meeting:
Today, markets expect interest rates to be between 3.50 – 4.75% at the end of 2023. So while there is a high likelihood of continued rate hikes, they will probably come at a slower rate next year than they have this year. This has some implications for investor portfolios:
- Short-term interest rates are higher, so investors should be able to get higher returns on cash.
- Bonds have had a historically rough year in terms of returns, but now, yields are much higher. This should help provide stability, diversification to stocks, and higher returns for investors going forward.
- Interest rates have a significant impact on the prices of all financial assets such as houses, stocks, and bonds. Volatility is always present when investing, and there are lots of reasons for markets to move. Even so, more stability in the interest rate environment could contribute to less volatility in the stock market next year.
- Since borrowing costs have increased, companies with quality earnings, cash flows, and lower valuations should be well positioned relative to their peers
If you would like to discuss how the current interest rate environment is affecting your personal portfolio, let’s talk.