econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 18 December 2015

Investing In A Slowly Rising Interest Rate Environment

by Gene D. Balas

The Fed's announcement this week to institute a quarter point hike in the Fed funds rate has arguably been one of the most widely anticipated decisions in the past year. While the strong jobs reports of late and ample Fed communications on the subject left only a few people with doubts of the Fed's move going into the meeting, Fed Chair Janet Yellen has taken care to emphasize the pace of rate increases will be slow and gradual.

To many observers, a slow pace of rate normalization simply represents a need by the central bank for caution amidst a sluggish economy and inflation that remains persistently below the Fed's 2% target. But there is a more fundamental and longer-term reason why the economy needs lower rates than it did in the past: The economy's potential growth rate is also lower. That means investors might not expect U.S. GDP growth rates to exceed 3% for any sustained period of time, and that is far lower growth than what we have enjoyed in the six decades since the end of World War II up to the Great Recession. Consider the nearby graph which represents potential economic growth.

Potential GDP Growth Rates

An economy's potential rate of growth is determined by two basic things: growth rate of the labor force (or perhaps a bit more specifically, growth in hours worked) and productivity (how much workers produce during each of those hours worked). It's hardly any secret the population is aging, and Baby Boomers have started retiring. As a result, the Bureau of Labor Statistics anticipates that the labor force will grow by just 0.5% per year over the next ten years. In addition, fewer of those of prime working years are expected to participate in the labor force, for a variety of reasons.

Meanwhile, the Congressional Budget Office (CBO) projects productivity will grow an annualized 1.6% per year from now until 2025. Summing productivity gains with the 0.5% growth of the labor force, yields (with slight rounding) the Bureau of Labor Statistics' 2.2% projected GDP growth rate over the next ten years, which is roughly identical to the CBO's 2.1% forecast for GDP growth during that period. By comparison, the CBO noted in its report that productivity gains from 1991 to 2001 were 1.9%, plus the labor force growth during that period of 1.3%. This yielded a potential economic growth of 3.2% for the 1991 to 2001 period. (Potential GDP growth is not the same as actual, realized economic growth.)

While all of this may seem a bit arcane, the main point of this isn't so much that the Fed plans to go slow with rate hikes and will reach a lower plateau, it is why it is doing so - and what this might mean for your investment returns. First, though, just by means of an explanation, the rates set by the Fed are correlated to GDP growth. The faster the economy grows, the higher rates usually are, as a faster growing economy can be more likely to generate unwanted inflation.

However, a slower growing economy can also be less likely to enable companies to generate profit growth to the same extent they might be able to during periods of robust economic growth. While cost-cutting moves might be possible, the unemployment rate is close to levels indicating "full" employment, below which companies may need to begin offering larger pay raises to their employees in order to attract and retain talent. So, companies may need to start doling out more pay to their employees - and that can spark the inflation that the Fed seeks. Hence, the timing is right for a rate hike. But that means that one key driver - profits - of stock returns may come under pressure, at least in the U.S.

For investors, that may mean considering international exposure, including beyond the developed world (where most countries have similar problems of low rates of labor force growth and thus, economic momentum). With this in mind, a diversified international exposure might possibly include emerging markets, which, over the long term, may experience faster rates of growth, albeit with more potential risks. International investing might not be right for everyone, but your United Capital financial adviser is ready to answer any questions you may have about ways such as this to diversify your portfolio.

By Gene Balas, CFA


Disclosures

Investing involves risk, including possible loss of principal, and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this piece is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances.

The information and opinions expressed herein are obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital. Opinions expressed are current as of the date of this publication and are subject to change. Certain statements contained within are forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.

International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and different accounting methodologies. Equity investing involves market risk, including possible loss of principal.

© 2015 United Capital Financial Advisers, LLC. All Rights Reserved


>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Is Free Trade Harming the Economy?
Bank of England Endorses Post-Keynesian Endogenous Money Theory
News Blog
The Age Of The Employee-less Employer
Projected Costs Of U.S. Nuclear Forces, 2017 To 2026
63.4% Homeownership Rate In 2016 Was Lowest Since 1966
The Homeownership Gap Is Finally Closing - Part Four Of Five
Infographic Of The Day: The Best And Worst Financial Decisions People Make
Early Headlines: Asia Stocks Mixed, Oil Mixed, Dollar Up, Gold Down, Microsoft Growth, US Cities' Homicides Up, Battery Age, Higher-Priced Carbon, Sweden Crime Data, Russia Passes Saudi Arabia And More
February 20, 2017 Weather and Climate Report - Transition to Spring can be Cruel
More Buck For The Chuck
More About What's Going On In Retail
Your Dog Has A Better Memory Than A Chimpanzee
Where Shadow Economies Are Well Established
What We Read Today 20 February 2017
Successful SpaceX Launch &amp; Landing Of Falcon 9 + Dragon CRS-10 Mission To The ISS (2017-02-19)
Investing Blog
Market And Sector Analysis 19 February 2017
Dollar Looks To Head Higher
Opinion Blog
Fascism Defined And Described By Oswald Mosley
Charity Is Not How We Solve Poverty
Precious Metals Blog
Deflation And Gold: A Contrarian View
Live Markets
21Feb2017 Pre-Market Commentary: Wall Street To Open Higher, Crude Prices And The US Dollar Both Rise, Investors Remain Bullish For The Time Being
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved