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<\/a><\/p>\nThe level of interest rates impacts the lives of most Americans.\u00a0 For instance, as interest rates rise, you will over time see slight increases in the amount of money you earn from your savings in the bank.\u00a0 If you plan to borrow money, the cost of a mortgage, construction loan, business loan, will all increase.\u00a0 As the cost of money increases, many of these assets that are heavily financed could see a decrease in volume or price or both. For instance, house prices may decline because a buyer\u2019s mortgage payments increase, thus lowering the affordability. Specifically, an increase from 4% to 5% in mortgage rates for a $400,000, 30-year mortgage, increases the monthly payment from about $1900 per month to about $2150, or nearly $90,000 more during the life of the mortgage. This is a meaningful amount for many borrowers.<\/p>\n
Changes in interest rates also impacts financial assets.\u00a0 As interest rates go up, the price of your fixed income portfolio will go down. In particular, if you hold bonds, whether corporate, sovereign, or municipal, the price will go down.\u00a0 It also impacts the value of gold.\u00a0 The impact on gold can vary depending on what is going on in the economy and world, however, generally, as interest rates rise, gold prices tend to decline.\u00a0 Gold is an asset that does not provide yield or interest, or cash flow, it is a safe haven asset.\u00a0 As interest rates increase, for many investors, it is better to keep money in cash at the bank than to hold a yield-less asset such as gold.<\/p>\n
The impact of changes in interest rates on equities, really depends on many other factors.\u00a0 From a textbook perspective, where all other things are held constant, higher interest rates have a negative impact on stocks.\u00a0 However, if the economy is improving, and investors want to unload their bond portfolios, stocks could continue to rise as interest rates rise.\u00a0 Stocks and bonds have moved in tandem in recent years, largely due to Federal Reserve policy.\u00a0 It will be very interesting to see, how the relationship changes as the policy normalizes.<\/p>\n
The combination of the election, economic growth, and changes in Federal Reserve policy could mark an important turning point for markets.\u00a0 It could mark a change in how various asset classes move in relation to each other.\u00a0 It could change the forward-looking return dynamics for many asset classes.\u00a0 Changes in interest rates and interest rate policy reaches nearly all aspects of American economic and financial life.\u00a0 It will be extremely interesting how the Federal Reserve follows through on their forecast.\u00a0 Last year, they expected multiple rate increases, and only did one.\u00a0 We will have more information in the coming weeks and months, stay tuned!<\/p>\n
Interested readers can reach Ketu Desai by email <\/i>ketu@isquaredwealth.com.<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"
While much of what you read would have you believe that the recent stock market rally is entirely due to the new president, the reality is that while his policies would be pro-growth, the economy was trending up even prior to him taking office. As the economy has improved, the Federal Reserve has started to…<\/p>\n