The Effect of Rising Interest Rates on Investments - John DessauerJan 10, 2022
The threat of the Fed increasing interest rates has been going on for some time. An increase in the interest rate, also known as the federal funds rate, has one primary effect. Banks have to pay more to borrow money from the Fed. That’s it. However, this effect leads to several other effects.
This is one of the primary reasons why higher interest rates hurt stock prices. The long-term growth opportunities are more limited.
When money is easier to borrow, businesses have the resources to expand more rapidly, and investor sentiment increases.
2. Many services and products increase in price to accommodate the higher costs. When products and services become more expensive, fewer people purchase them. Price elasticity varies with the product and service, but sales can slow. This also hurts most businesses. Interestingly, commodity prices are considered immune to this phenomenon.
3. Bond prices tend to drop, causing an increase in yields. This is one of the reasons diversification between stocks, bonds and real estate is recommended. When economic conditions favor bonds, stocks and real estate tend to fall, and vice-versa. Being invested in all three can be an effective means of hedging your risk. This is an excellent time to purchase bonds.
If you already own bonds and need to sell, you’ll likely receive a lower price for them.
4. Investors can leave stocks and flock to bonds. When interest rates rise, many investors will liquidate part of their stock holdings and move to bonds. This will also affect mutual funds, which are made up of groups of stocks. Large sell-offs can further degrade stock and mutual fund prices.
5. Savings accounts become more attractive. Arguably, the rate of savings can also increase during periods of higher interest rates. Investors can be less likely to spend money due to increasing prices. Savings accounts are also more favored because the returns are higher during periods of high interest rates. Right now interest rates are abysmally low, but look for that to change when interest rates are on the rise.
Like our blogs? Stay connected to the new blogs that come out and other business and real estate news !
Join our mailing list to receive the latest news and updates from our team.
Don't worry, your information will not be shared or sold (who would do that anyways...)!
We hate SPAM. We will never sell your information, for any reason.