Rising Interest and Markets
By: John P. Napolitano, CFP®, CPA, PFS, MST
For the past several years, we have all been concerned with the rising interest rate world and wondered what it would do to our financial markets. Not many, on the other hand, were calling for another drop in rates and testing the low rate environment that has driven our economy for the past decade. But that is exactly what has happened.
If you look back to early in 2019, you’d see that interest rates were significantly higher. The Federal Reserve Bank had just ended a series of rate increases to offset what appeared to be a hot job market, the possibility of inflation and a rapidly expanding economy. The result was a pretty bad fourth quarter for equity investors and fixed income investors alike.
But since the start of the year, rates have fallen off a cliff with many experts now thinking that there may be even more room for rates to drop. I don’t have a crystal ball, but I do recognize that once again the cost of money is so low that it may be time to act.
Home refinances are again hitting record levels. If you have a mortgage, now may be a good time to explore your options. For example, those with some sort of variable loan may now be able to refinance and obtain a fixed rate loan lower than the last variable rate note that was signed just a year or two ago.
This could be a good time to make capital improvements to your home or business. Banks today are still quite eager to lend. As a business owner, there may be opportunity that’s evading your company due to capital. Consider speaking to a bank to ask what possibilities may be available to expand your business.
On the home front, these low rates have helped to extend what is still a very hot real estate market. Just like any real estate market, there are always pockets of opportunity and pockets of overvaluation. But in general, when financing costs are this low pricing tends to be at a premium.
The biggest downside of low rates may be for the most conservative investors. Your gross rate of return is important, but not as important as your real or net rate of return. A real rate of return is expressed in terms of how much the yield or total return exceeds the rate of inflation. Creating a positive real rate of return is crucial for those who want their savings to keep up with the rate of inflation.
When rates are very low, as we have seen in certain types of deposit accounts, your real rate of return may be negative. That means you may be losing purchasing power on your savings. This may be ok for a short period or if you are simply afraid to take any risk, but understand the consequences. Perhaps before you go and renew that next CD, you should shop around to see what better deals may exist. If you don’t like what your bank is offering, ask them if there are any other options.
John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.