Markets grew at a humble rate last week and volatility has come back down. As we look ahead to the next growth cycle, interest rates will likely play a pivotal role for equities.
US equities have surged over the last 2 years as we have experienced a low level of inflation and, as a result, a low level of Federal Reserve Board (FRB) tightening. It is expected that inflation will pick up over the medium term and the FRB is expected to become increasingly hawkish on interest rates.
Most people know to expect that increasing interest rates spell losses for their bond holdings, but, what many fail to remember is that a rising rate environment increases the debt obligations for many corporations. Companies deemed ‘growth’ may experience a lack of just that. As re-investment into their businesses slows in exchange for payments to increased debt obligations.
FRB minutes from their January meeting did show that the inflation expectations for 2018 would remain under 2%. This could just be the last *gasp* stocks were looking for in order to push on!
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