Hi everybody, I hope you had a great summer.
Today I’m going to talk about something that’s been in the news quite a bit and, to an extent, what is driving the financial markets right now.
Yes, we know about the upcoming midterms, the geopolitical chaos and the worries about AI running wild. In the financial markets, these are all sideshows to the main event, which is happening in the bond market.
Why Rates Are Rising
If you watch closely, you’ve seen interest rates have been rising for the last couple of months, to rates we haven’t seen in 25 years. Now that’s not necessarily a bad thing. If rates rise because the economy is strong, that’s good. The AI data center build-out is a big driver of the economy.
But it costs money to build these things. So there is a lot of debt being issued to raise the needed money. Investors understand there are risks to this build-out, and they want to be compensated. That makes sense.
Couple that with the $40 trillion debt that the U.S. government has now, and you have the prime reason why rates are going to go up.
In my eyes, the bond market is fibrillating. Kind of like a nervous heart.
What Higher Rates Mean
Higher rates mean higher expenses for mortgages, which hurts the housing market. Higher rates could impact company earnings, which could impact stock prices. They impact auto loans, maybe putting a damper on car buying. A lot of stuff is tied to interest rates.
So one worry is that things might spiral out of control.
A New Fed Chairman, a Familiar Test
I’ve talked about this for a while. Over the years, we have seen a new Fed chairman come in and be greeted with a situation or a crisis. The market wants to see how the new chairman is going to react. We saw this with Paul Volcker, we saw this with Alan Greenspan, we saw this with Ben Bernanke, we saw this with Janet Yellen, and we saw this with Jay Powell.
I think we’re seeing it right now with Kevin Warsh. How he handles things could make a big difference in how the markets react into the final quarter of the year.
What It Means for Your Portfolio
If rates continue to rise, you’ll see an impact on the stock market. Now, it’s not that the market can’t handle 5% 10-year Treasury rates, because those rates were pretty common back before 2000, but we’re normalizing now.
I think we all have to get used to higher rates. It’s been a while since we’ve had a good correction in the market, and don’t be surprised if one comes about before year-end. Make sure your portfolio allocation is proper, that you’re not too invested in all the big companies that are driving the index results, and stay balanced. Keep enough money as sleep-at-night money, and I think you’ll be happy that you did that.
All information is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy. Cetera Wealth Services, LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.
