e when a simple return to normalcy has generated so much fanfare. We need only to loosel
” as having a federal funds rate higher than zero (or near zero). As we can seeDecember
from the 2015
chart, th
e has been near zero since late 2008 which has historically been abnormally low. Thus, make n
er interest rates have historically been completely normal.
Source: Board of Governors of the Federal
System.
ByReserve
Matthew
D. Savery, CFA, CFP
RETURNING TO NORMALCY
Chief Investment Officer
®
ning
to Normalcy
The Federal Reserve is likely to begin slowly increasing the
By Matthew D. Savery, CFA, CFP®
In the world of investing, “fanfare” more often means
Chief Investment Officer
2015
“fear.” Of course this stems mostly from the financial
federal funds rate this week. It is difficult to remember a
media, but I believe that many investors fear that higher
time when a simple return to normalcy has generated so
interest rates will be a detriment to the markets—both fixed
much fanfare. We need only to loosely define “normalcy” as
eral having
Reserve
is likely to begin slowly increasing the federal funds
rate this week. It is difficult to
income and equity. But before jumping to any conclusions,
a federal funds rate higher than zero (or near zero).
r a time
a simple
has rate
generated
so much
fanfare.
onlyato
loosely
let’s look
at theWe
factsneed
and take
look
at the most recent rise
As wewhen
can see
from thereturn
chart, to
thenormalcy
federal funds
has
ormalcy”
as
having
a
federal
funds
rate
higher
than
zero
(or
near
zero).
As
we
can
see
from
the
chart,
the and ended in
in
the
federal
funds
rate
that
began
in
2004
been near zero since late 2008 which has historically been
see how the low.
markets
responded
low.near
Thus,
make
no late
mistake
higher
nds abnormally
rate has been
zero
since
2008that
which
hasinterest
historically2006
beentoabnormally
Thus,
make no(red circle).
rates have
historically
beenhistorically
completely been
normal.
hat higher
interest
rates have
completely normal.
Source: Board of Governors of the Federal Reserve System.
investing, “fanfare” more often means “fear.” Of course this stems mostly from the financia
eve that many investors fear that higher interest rates will be a detriment to the markets—bot
equity. But before jumping to any conclusions, let’s look at the facts and take a look at the mos
federal funds rate that began in 2004 and ended in 2006 to see how the markets responded (red
orld
of investing,
“fanfare”
more
often
means
In mid-2004,
the
federal
funds
rate“fear.”
began Of course this stems mostly from the financial
federal
funds
rate began
at 1.00%
and
1.00%investors
and ascended
to 5.25%
the
ut I believe thatatmany
fear that
higherbyinterest
rates will be a detriment to the markets—both
%
by
the
summer
of
2006.
In
only
two
of 2006.
In only
twoconclusions,
years, this let’s look at the facts and take a look at the most
ome and equity.summer
But before
jumping
to any
short-term
rate
jumped
by
4.25%!
we in 2006 to see how the markets responded (red
-term
rate funds
jumped
bybegan
4.25%!
e in the federal
rate that
in 2004As
andAswe
ended
know, bond prices and interest rates have an
ces and interest
rates have interest
an inverse
inverse relationship—as
rates rise,
bondrise,
pricesbond
fall and prices
vice versa.fall
However,
interest rates
and
as interest rates rise, bonds kick off more
004,
fundsrates
rate began
andprice
ver,theas federal
interest
rise,
bonds
kick
off
interest
which
helps at
to 1.00%
offset the
to 5.25% by the
summer
of
2006.
In
only
two
decline. The conventional thinking is that
ich
helps
to
offset
the by
price
decline.
The
whenjumped
interest rates
rise bonds
s short-term rate
4.25%!
Asmust
we perform
poorly.
nking
is and
that
whenratesinterest
ond prices
interest
have an rates
inverse rise
ip—as
interest rates rise, bond prices fall and
rm
poorly.
. However, as interest rates rise, bonds kick off
rest which helps to offset the price decline. The
Source: Board of Governors of the Federal Reserve System.
Returning to Normalcy – December 2015
The thinking is similar on the equity side as many see higher interest rates as being a restriction on the economy and thus,
stock prices must also decline when rates rise. But the facts tell us a different story. Take a look at the table to see the total
return performance of the Barclay’s Aggregate Bond Index and the S&P 500 Index during this time of rising interest rates:
Barclay’s Aggregate
Bond Index
20044.34%
20052.43%
20064.33%
20076.97%
S&P 500
Index
10.88%
4.91%
15.79%
5.49%
Source: Stocks and Bonds, Calendar Year Performance; about.com.
It is clear from the most recent rise in the federal funds
rates, that neither bonds nor stocks must be hurt by the
Federal Reserve’s decision to increase short-term interest
rates. It might be a mistake to think otherwise. To be
clear, we are not making any kind of forecast regarding
how markets may perform when interest rates begin to
eventually rise this time. The point we are trying to make is
that the conventional wisdom is often wrong.
The good news is that successful investing does not require
knowing how the markets will react when interest rates
begin to rise. A successful investor understands and plans
for the certainty of uncertainty. Yesterday’s discussion
revolved around the uncertainty of international economies
and a drop in oil prices. Today’s discussion revolves around
the uncertainty of interest rates, Federal Reserve actions,
and high-yield corporate debt. Tomorrow’s discussion will
revolve around something entirely different. The point is
that there will always be uncertainty when we invest. It’s just
that what we are uncertain about changes regularly.
Successful investor’s do not let uncertainty get the best of
them. An excellent defense against uncertainty—or in this
specific time, rising interest rates—is to have a low-cost,
globally diversified portfolio with a strategic asset allocation
based upon your own unique need, ability, and willingness
to take risk. And then, from time to time rebalance that
portfolio back to your strategic allocation. Regardless of
what interest rates, international markets, oil prices, or
anything of the like may do, a well-designed investment
portfolio can provide certainty in an uncertain world.
“The good news is that successful
investing does not require knowing
how the markets will react when
interest rates begin to rise.”
We will likely have further insights on interest rates in our upcoming quarterly newsletter due out in January. In the meantime,
should you have any questions, please feel free to reach out to your M. Griffith advisor.
M. Griffith assists individuals, corporations, non-profit organizations and retirement plan trustees in structuring investment portfolios. For
individuals, investments are addressed within the context of one’s total financial structure, including taxes, retirement and estate planning. We
welcome your comments and would be glad to answer your questions. The foregoing is provided for information purposes only and is not to be
construed as a recommendation of any kind. CFP® and CERTIFIED FINANCIAL PLANNER™ are certified marks owned by the Certified
Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP® Board’s initial and ongoing
certification requirements.
555 French Road, Building 2
New Hartford, NY 13413
315-797-0130
www.mgriffithinc.com
Financial Planning Services • Investment Advisory Services • Retirement Plans Services