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Rising Interest Rates: What Investors Need to Know

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Rising Interest Rates: What Investors Need to Know

The Federal Reserve voted to raise its benchmark interest rate to 1.5 percent, and this likely won’t be the last such move in the near future. We expect three more rate hikes in 2018 and possibly more in 2019.

Since the recession began in 2008, the federal funds rate has stayed at historically low levels to encourage economic rebound and investment in our economy. In the last few years of recovery, that rate has slowly inched upward to keep growth in check and inflation under control. There is a fine line between recession and inflation, and that’s the challenge the Fed is dealing with and will continue to address going forward.

Rates remain an important factor for investors to watch so they can rebalance their portfolios accordingly. Keep an eye on these two possibilities in particular.

Bonds
Because we’ve been in such a low-rate environment for so long, bonds haven’t had the yields some investors look for. For many savers, few options existed outside of the stock market. But as rates go up, expect a rotation from dividend-paying stocks, lower-yielding CD’s and money market accounts into the bond market. Individual bonds will have new, higher yields, and we expect many to take advantage of them.

Conversely, existing bond mutual funds could see the opposite. Most will decline in value with rising interest rates, causing some investors to seek alternatives. That means fund managers may have to liquidate both good and bad bonds. Individual bonds offer greater safety of principal for the typical investor, which is why we continue to prefer them.

International Markets
As interest rates continue to rise, U.S. economic growth will likely begin to slow. International markets, on the other hand, are currently two to three years behind the U.S. in the economic cycle and should remain quite attractive for a little while longer.

Investors should give international markets a second look and consider adding to their portfolios if they’re underweight. They should maintain better valuations when compared to U.S. stocks. As American market trajectories start to level off, theirs could be sloped upward for a little while longer.

While some investment options will start to look more attractive as a result of rising interest rates, the advisors at The Oakley Group are advising clients not to get too excited. In our opinion, rates will likely continue to rise for the next year or maybe two, but we are staying the course, remaining diversified, rebalancing at regular intervals and watching closely to see how the economy absorbs each rate hike. If rates start to rise too quickly, or the economy begins to falter, we will adjust.

 

Sam Oakley is a managing director with Pinnacle Asset Management and a financial representative with Raymond James Financial Services, Inc., member FINRA/SIPC. He can be reached at [email protected]om or (615) 743-8999


Pinnacle Asset Management is not a registered broker/dealer, and is independent of Raymond James Financial Services. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Sam Oakley and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC, an independent broker/dealer and are not insured by the FDIC or any other government agency, are not deposits, not guaranteed by Pinnacle Bank and are subject to risk and may lose value. Pinnacle Asset Management and Pinnacle Bank are independent of RJFS.

There is an inverse relationship between interest rate movement and bond prices. Generally, when investment rates rise, bond prices fall, and when interest rates fall, bond prices rise. International investing involves additional risks such as currency fluctuations, differing financial accounting standards and possible political and economic instability. These risks are greater in emerging markets.

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