For the better part of this year, you have likely heard from us that we believe the tide is turning, and the next decade will look a lot different than the past decade. For the past 40 years, interest rates steadily declined, marking an era in financial history. After the 2008 Global Financial Crisis, the Fed took unprecedented measures, dropping the Federal funds rate to zero to revive the economy. A low-rate environment for 13 years resulted in the longest economic recovery on record, offering what seemed like ‘easy times’ for businesses and investors.
The tide began to change with the onset of the pandemic. As COVID-19 disrupted global systems and triggered supply chain disruptions, governments responded with historic financial stimulus packages. An inevitable surge in inflation came in 2021, and escalated further in 2022. To counter this inflation surge, the Fed raised rates, setting the stage for a new investment landscape.
We foresee a significant and enduring shift on the horizon. It’s improbable that we will return to an era of ultra-low interest rates in the coming decade. Even as the economy was growing, the Fed’s attempt to raise rates faced resistance in both the investment and political realms. Near-zero rates were intended to be an emergency tool to help stimulate the economy after a financial crisis and were only meant to be a short-term policy. Under pressure to keep rates low, the Fed expressed concern it no longer held the option of lowering rates in the event we have a new financial crisis. We believe the Fed has learned from this experience and will avoid dropping rates to these levels again unless there is a true financial crisis.
While the Fed might reduce rates in 2024 to counter a potential recession, a return to a near-zero rate environment is unlikely. This shift implies slower economic growth ahead than what we have seen in the recent past. However, with change comes opportunity. We believe there is a silver lining in higher interest rates and income yields. These factors pave the way for growth opportunities, but it also changes the way we view the risk and reward spectrum between stocks and bonds.
What does this mean for you?
We have not changed our greater philosophy. As always, we advocate that you focus on goals-based investing. We recommend regular review meetings so we can update and track the progress toward your longer-term investment goals. In 2024, we may discuss using more conservative assumptions for your near-term investment planning. We may want to show you the projected impact on your plan of increasing your personal savings rate, adjusting your risk preference or investment objective, or increasing your allocation toward income-producing investments.
These considerations will all depend on your unique circumstances and goals, and we look forward to reviewing this with you. Our objective in the new year will remain the same; to help you make informed decisions and navigate toward your personal investment horizon.
Past performance is no guarantee of future results. Please note that individual situations can vary. All investing involves risk including loss of principal. No strategy assures success or protects against loss. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.