As we enter June of 2023, it is interesting to observe how much interest rates have risen year over year, which is a staggering 650% increase!
While such dramatic actions by the Federal Reserve are rare, the current economic climate we are living through is unusual and calls for action.
However, when regulators step into the financial markets, repercussions inevitably occur. With rising interest rates, bond prices have dropped, and portfolios containing them have lagged. Meanwhile, stocks have been volatile and nearly flat year over year.
So, what does the future hold? While it is impossible to predict, we can make an educated guess about what periods of high-interest rates will do to financial markets.
Firstly, it is essential to note that the Federal Reserve Chairman has indicated that future rate increases are not imminent and that further action would receive increased scrutiny given the cooling inflation numbers.
Given the potential for a period where rates remain the same or decrease should a recession emerge, savers will likely continue to flock towards savings accounts, certificates of deposit, annuities, and bonds, given that these financial instruments are finally paying meaningful interest.
Meanwhile, consumers and businesses will borrow less money since borrowing costs have risen, causing the economy to slow down and, in theory, lower inflation to more reasonable levels.
The result of these moves by consumers and businesses is a slowed economy that, if not adequately managed by regulators, could result in a recession.
Therefore, the outlook for stocks in the near time is uncertain, but there is increased potential for equity investors to experience another period of flat returns or even losses.
The financial markets are complex systems that are difficult to understand fully, but one way to manage uncertainty is through creating and adhering to a financial plan.
If you have yet to create a financial plan that lays out how you will invest during the ups and downs, how much money you will need in retirement, and how to manage risk, then now is the time.