The Interest Rate Pendulum changes direction

Executive Summary

• The US announced a 50bps cut to their key overnight lending rate in September. Cuts are predicted to continue over the coming year. 
• Many countries around the world (including Canada with 2 cuts starting in June) are now cutting rates after one of the most aggressive periods of interest rate hikes in history.
• The US remains the most important market in the world and is sitting on a strong foundation of increasing earning growth and reasonable valuations. 
• The US election is likely to cause uncertainty in markets. If we use history as a guide, politics can cause short term volatility but in the long term has little to no impact.   

For those of you who tune in to the financial media on a regular basis, you will no doubt agree that interest rates have been the hottest topic of the last three years. It was unnerving to see the blistering rate of interest hikes beginning in 2022 as it started, then picked up speed, influenced by higher inflation, as the pendulum swung. It was a relief to see first, the inflation numbers start to moderate and then the gravitational pull of that lower inflation allowing policymakers to begin to cut interest rates. 

As with many things we encounter in today’s world, this interest rate cycle was no different, but it could be argued that it was faster and more pronounced than any we have seen in the last 100 years. As Mark Twain once said, “history never repeats itself, but it does often rhyme.”  

What does it mean to you and I, now that the cuts have begun

1. Expenses are by far the most important variable of your financial plan. The cost of borrowing will potentially decrease in the coming years and the cost living will most likely stop increasing at the horrendous pace of the last few years. 
2. Many governments around the world are now in easing mode. With this support, business’s experience lower borrowing costs and an environment where they can increase earnings more easily. This can be a tailwind for your investment portfolio. 
3. Time in the market continues to be more important than timing the market. If we had made huge changes in portfolios to benefit from ever increasing interest rates, we would have been happy for a few months and then missed the market run up of the last 18 months. Sticking to our process is crucial for long-term success. 

What ChatGPT told us to say about interest rates

We continue to explore Artificial Intelligence and how we can use it to better your financial outcomes. As an experiment, we asked for a breakdown of the interest rate environment in North America and here is what we received. 

Interest rates in North America have seen significant fluctuations recently, influenced by central bank policies aimed at managing inflation and supporting economic growth. The Federal Reserve and the Bank of Canada have adjusted rates in response to shifting economic indicators, impacting borrowing costs and investment strategies. For investment clients, these changes present both challenges and opportunities. Lower rates can stimulate spending and investment in equities, while higher rates often lead to increased yields in fixed-income securities. It's crucial for clients to stay informed about these trends and consider diversifying their portfolios to balance risk and capitalize on potential returns in varying interest rate environments.

Not bad but we will still bet on humans to put things into context and perspective! 

Why we are optimistic about future investment growth

Jurien Timer, Head of Global Macro at Fidelity Investments and one of our favorite information sources recently said the following in an article called Decompression. 

‘With the Fed believed to be on the cusp of an easing cycle while the US economy remains in an expansion, the market is in the sweet spot of the market cycle.  Financial conditions have remained favorable while earnings have been growing and the cost of capital has been coming down.  Meanwhile, the average stock in the S&P 500 has been trading at a 18x multiple and the leadership has broadened.  What’s not to like?’

We would agree and although it is always possible to be hit by something we don’t see coming, what we do see, looks productive. 

The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index. Past performance does not guarantee future results.