Should I Bet Big On Interest Rates?
Since the beginning, the Federal Reserve has functioned as a lubricant for the economy. However, at some point, the Fed arguably became the fuel. This shift for the Fed has helped to create the difficult interest-rate scenario currently plaguing the U.S. Likewise, this has many investors very concerned about the impact of interest-rates changes on bond prices.
It has been nearly seven years since the last Fed rate hike. With the Fed funds rate target still hovering at 0-0.25 percent and the 10-year U.S. Treasury ending June at 2.36 percent, the path back to “normal” interest rates is still in front of us.
The 10-year U.S. Treasury yield finished June 2007 at 5.06 percent, just eight years ago. However, we have not seen rates north of 4 percent since the end of 2007.
We are in a very unique interest-rate environment in the U.S. and there is a tricky path ahead.
We have seen some analysts place the probability of a rise in rates in September at less than 25 percent. The probabilities generally look higher as you approach December. Ultimately, no one knows for sure yet, as we don’t believe the decision has been made. Likewise, many things may change between now and then.
With the one- to three-year target investment horizon at which the TOPS team approaches strategic decisions, we feel comfortable that rates are expected to rise in our path, which we are prepared for. We would discourage investors from making big bets on interest-rate moves. Recognize the rate path may not be as they expected.
Should I Worry About The Stock Rally Ending?
The current stock market rally in the U.S. is nearly 6 ½ years long, making it longer than the average bull market (going back to 1950). We frequently hear investors say things like, "This market is getting long in the tooth.”
It is human to accept that "all good things must come to an end." Each day that the current bull market trudges on, we get one day closer to the next bear market. A problem with this logic is that we don't know the total life span of a bull market until it dies.