Peak interest rates and your investments

Farewell low inflation.  Cheerio near-zero interest rates.  You’ve been great, the last decade was a blast. Nice knowing you. Welcome 2023.

But has 2023 been welcome as we find ourselves in a new economic landscape?

In the aftermath of Covid-19, with exuberant fiscal stimulus and now growing geopolitical tensions, the Federal Reserve has raised interest rates to a 22-year peak of 5.25%-5.5%, echoed by the Bank of England at 5.25% and the European Central Bank at 4.5%.  These hikes have tightened the financial vise, with surging energy costs, diminishing consumer purchasing power, and wage-related strikes adding to our daily grind.

But we’ve been here before – the 1980s “Volcker Shock”, 1992’s “Black Wednesday”, the early 2000s’ “Dot-com Bubble”, 2008’s global financial crisis, and 2020’s pandemic.  Each crisis, now synonymous with spiking inflation and rate hikes, often precedes recessions.  But today’s economic climate is an outlier, and recession, while possible, isn’t a foregone conclusion.

History tells us there is a strong link between soaring inflation, rising rates, and economic downturns. But there are exceptions where economies have managed to correct course after a crisis in an orderly fashion.

The current US trajectory suggests such a ‘soft landing’ is possible: inflation rates are retreating, interest rates appear to have peaked, yet the economy remains robust, potentially steering clear of recession.

The interplay of monetary policy, economic resilience, and myriad other variables makes predicting such outcomes challenging.  Each cycle is distinct, with inflation, interest rates, and recession not bound by a fixed cause-and-effect mechanism.

Investment markets, however, tend to respond to these rate adjustments accordingly: bonds often decline as rates climb, growth stocks recalibrate under valuation pressures, but sectors like utilities and real estate may shine when rate hikes are paused.  If rates decrease as forecast for 2024, cash appeal diminishes, bonds can gain value, and growth sectors outside of the narrow tech bubble seen year to date, could thrive from revitalised borrowing and innovation potential.

In this fluid environment, we believe agility and adaptability in your investment strategy is crucial.

At MM Wealth, we emphasise staying informed and flexible in our decision-making, building bespoke solutions for the long term.  If you are worried about the value of your money in the bank coming into this next phase of the economic cycle, or would like us to review your current investments, please don’t hesitate to contact one of our financial planners.

For bespoke financial planning and investment advice, please speak to a member of our financial planning team on 01223 233331.

Disclaimer

Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.

The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.