Extreme interest rates in 1981-1982 gave way to the greatest bull market in American history. Interest rates are again at an extreme, but this time a bear market in stocks, bonds and perhaps real estate lurks in the shadows.
Imagine earning 15% at the bank and almost 20% in money market funds with 15% mortgage rates. Welcome to a visit back to the early 1980’s. Now contrast that with today’s interest rate scene where you can’t get 1% with safety and liquidity with mortgage rates below 5%.
If you are a new investor you might not realize how extreme today’s rates are. As an inexperienced or new investor you likely don’t understand how your bond funds, stock funds and real estate investments could be affected if interest rates go up significantly in the not-too-distant future. And it’s quite likely that you have money invested in at least one of the above.
Interest rates were at all-time lows in late 2009. In 1981-1982 they were at historical highs in the USA, and so was inflation. A bear market in stocks, bonds and real estate turned into a bull market in the late summer of 1982, as interest rates fell and the interest rate environment basically remained investor friendly without going to extremes. For more than 17 years the new investor could hold bond funds, stock funds and real estate for the long term and make money.
Today we are in uncharted waters. I’ve followed the economy and the investment scene since 1972. I watched and invested as the above scenario unfolded. It made investing rather easy. The possibility of a reverse scenario in the future is not a pleasant thought. If rates go up a couple of percentage points and stabilize… most investors would experience a setback. If interest rates soar, all bets are off.
Bonds and bond funds will get clobbered, especially long-term issues. Higher rates are no friend of the stock market or real estate either. Corporate sales fall and interest expenses go up when rates rise and consumers cut spending. With lower corporate profits (or losses) there is usually a bear market in stocks. Real estate has enough problems without having to deal with higher mortgage rates. Even at a 5% rate, real estate activity and prices are in a slump.
Always keep an eye on interest rates. They affect virtually all investments. People invested in the money markets and other short-term safe investments will benefit when rates go up. Few others will. The government is busy trying to keep rates low to get the economy moving. Eventually interest rates will go up. Be prepared when this happens… not surprised.