Investors, Look for Buying Opportunities While Interest Rates Remain Low
The financial sector and housing market may benefit while the Fed continues its steady-as-she-goes approach.
If there was ever any doubt that we would end the year without a big interest rate hike, it's probably been erased by now. Still, investors should keep an eye on the Federal Reserve because their actions—or inactions—can tell us something about how well they think the economy is humming along and provide some clues as to what you should be doing with your money.
For now, because of Brexit and other global-market concerns, I'd say the folks at the Fed are in no particular hurry to raise the nation's unusually low interest rates too fast. The more likely short-term scenario is there could be one small increase sometime between now and the end of the year to ever so gingerly lift the rate.
Why the hesitation on the Fed's part?
For one thing, the market does not seem to be expecting anything more than an incremental increase, as I'm sure the Fed knows. Anything beyond that would catch the market by surprise, and as we saw with Brexit and many other unexpected moments in the economy, the market does not like surprises.
It's also worth remembering that one of the Fed's main responsibilities is to pursue full employment. Right now, employment looks pretty good overall, with the unemployment rate hovering around 5% (after ratcheting up to 10% at the height of the recession).
So there's just not much incentive on the Fed's part to do anything that risks spooking the market. I think what's more likely to happen is the Fed will gradually raise interest rates—not over a period of months, but over a period of years—closer to the historical norm of about 6.5%. When the Fed does that, it is signaling that it sees a healthy, improving economy that can handle the rate increase—as long as the rate increase doesn't come sweeping in too quickly.
This steady-as-she-goes increase is a big call to action for investors because it should create some buying opportunities in the market.
Where would those be? A few examples of the potential upside: The financial sector would be one place to look because they tend to benefit from a growing economy. The housing market and companies that rely on discretionary consumer spending also could do well because, as wages improve, people can look beyond life's necessities and afford bigger homes, nicer cars or vacations that take them farther than an hour's drive from home.
Of course, even in the best of times, not everything is a good bet. As interest rates rise, bonds will suffer as their prices fall. Those who have invested in longer-term assets could experience a loss. Such investors generally are trying to hold onto their principal while chasing yield, but they may find they were carrying more risk than some people in the market.
Finally, investors should always be ready for any market volatility because that can create good buying opportunities for those who are prepared and remain calm. As so often is the case, patience will win the game.
Chris Abts, president and founder of Cornerstone Retirement Group Inc. in Reno, Nevada, is an Investment Adviser Representative, licensed insurance agent, and has passed the Series 65 exam.
Ronnie Blair contributed to this article.
About the Author
Chris Abts is president and founder of Cornerstone in Reno, Nevada. He holds a Series 65 securities registration and has earned the Certified Estate Planner (CEP) and Chartered Retirement Planning Counselor (CRPC) professional designations.