The New Normal is Actually the Old Old Normal
By: Patrick R. Cote CFA, CFP®
For over a decade, interest rates have been near zero, a phenomenon that had never been seen before in the US. Now with the US over a year into a rising interest rate environment, we are starting to see a return to the old old normal.
After the financial crisis of 2008, the Federal Reserve lowered rates to near zero to help stabilize the financial system. However, instead of raising rates during the recovery, they kept interest rates artificially low until 2022. The unprecedented decade of low interest rates fueled the rise of large-cap stocks, particularly in technology.
The low interest rate environment made bonds less attractive, as investors sought higher returns in the stock market. The recent rise in interest rates can actually be good news for savers and investors, particularly those in retirement.
At the same time, large-cap tech stocks are less likely to do as well in this environment as they did over the last decade. Companies that are not profitable today and are only expected to make profits in the distant future are now less valuable – their future profits are now “discounted” at a higher rate today, which can lead to lower stock prices.
Investors who are mostly in US large-cap stocks today should consider a more diversified portfolio. As a good example of the benefits of diversification, from 2000 – 2010 (from the dot com bubble to the financial crisis), all of the following asset classes outperformed US large cap stocks: emerging market and non-US developed market stocks, commodities and REITs. While we may see something different over the next decade, it serves as a good reminder to stay well diversified in many asset classes beyond US large-cap stocks.