August-Here’s To Your Wealth
To raise or not to raise? That has been the question for most of the past few years if you are a voting member of the Federal Open Market Committee (FOMC). The FOMC is the arm of the Federal Reserve Bank that votes on what they want to do with interest rates. The challenge is that while the U.S. economy shows signs of strength, the global economy has pockets of both weakness and extraordinarily low interest rates. So why does this matter?
If the U.S. is the only major economy to raise rates then we will attract money from overseas investors who are seeking yield. Sounds good, right? But the flip side is that as this happens, our currency will appreciate and when this does, it costs more for overseas consumers to buy our goods. This hurts our exporters and eventually will weaken our economy. So the Federal Reserve Bank (the Fed) is walking a delicate line in a world where major economies like Germany and Japan have negative yields on their, for example, ten year bonds. Other countries are keeping their rates low in an effort to stimulate their slow-growth economies.
How does this affect you? Basically, if you are a net borrower, you like low interest rates. Other than credit card debt which seems to be immune from the market forces of lower rates, the cost of most consumer debt is near all-time lows. This is evidenced by the zero percent offers at major home remodeling stores or auto dealerships eager to move product. And homeowners are also benefitting from very low mortgage rates. But if you are a net saver, especially if you are a conservative retiree, then the Fed action has been crippling your ability to earn more than the rate of inflation. The unintended result of the Fed keeping rates low is that savers are punished by low interest rates. This is because low yields on savings and money market accounts lead savers to riskier assets in an attempt to outpace inflation. The potentially negative impact of being in higher risk investments has not yet been felt by investors since we continue to enjoy one of the longest running bull markets in U.S. stock market history. But when the music finally stops, and those beloved high dividend stocks decline, then investors may find out what is in those “income funds” they own.
As far as what is next for interest rates, we don’t have a crystal ball, but we continue to be on point with our thesis that low interest rates are here to stay – for a while at least. We have offered this guidance for some time and believe that the Fed will continue to not only be influenced by the slow growing global economy, but also their reluctance to cause economic instability at home. Even if the Fed raises rates once or even a few times, which may be possible after the November elections, we are starting at such a low point on the yield curve that it will take years to get back to where we were prior to the pre-crash levels of 2008.
Quote of the Day:
“If you cannot do great things, do small things in a great way.”- Napoleon Hill
Mark Avallone, MBA, CFP®, CRPS®. www.PotomacWealth.com
Securities and Investment Advisory Services offered through H.Beck, Inc., Member FINRA/SIPC. 6600 Rockledge Drive, 6th Floor, Bethesda, MD 20817 301.468.0100. Potomac Wealth Advisors, LLC is not affiliated with H.Beck, Inc.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Diversification and asset allocation do not guarantee against loss. They are methods used to manage risk.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Consult your financial professional before making any investment decision.