"Rethinking Returns: Navigating the New Landscape of Investment Amidst Falling Rates"
Brendan Greenwood CFP, CIM, B.Comm | September 26, 2024
Since the 1980’s the stock market (S&P 500) has often performed well when interest rates fall. But this time around interest rate cuts may not be the immediate relief some investors expect it to be for US corporate earnings and the US stock market. This is because financing costs for many American companies are likely to increase rather than fall in the upcoming years. When the Fed lowered interest rates to near zero in 2020 and 2021 savvy finance directors locked in long-term financing for their firms, insulating them from interest rate hikes in subsequent years. 2.5 trillion dollars worth of these lower interest corporate loans are coming due over the next 3 years (source: The Economist). These fixed loans will need to be financed at much higher rates, eating into corporate profits. At the same time short term cash deposits on hand for business activity will generate lower interest income.
With growth stocks priced to perfection and US corporate earnings growth likely to slow, where should we look to for investment return?
Value Stocks aka. cheap stocks
If large US companies are having to re-finance debt at higher rates that’s not great for more levered growth stocks. You may want to look at value stocks which are cheaper than many growth stocks in relation to earnings.
Fixed income
With interest earned on money market funds and GICs declining, investors should be locking in higher rates through investment in investment grade bonds. Adding international bonds to the mix could also help enhance returns in the event the US dollar weakens relative to the currency the foreign bonds are held in.
Gold
With potential for greater geopolitical instability, the prospect of re-emergent inflation and falling interest rates, gold has become a very attractive safe haven for investment. As interest rates on safer investments such as GICs and money market funds continue to decline more money will likely continue to flow into gold.
Final Thoughts
While historical trends suggest that falling interest rates typically benefit the stock market, the current economic landscape presents unique challenges that could dampen this effect. As many companies face increased refinancing costs, growth stocks may struggle under the weight of rising debt expenses. By diversifying your investment portfolio across the asset classes above, investors can better navigate the complexities ahead and position themselves for potential growth.
Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. focused on improving the lives of his clients and their families through holistic planning. He specializes in tax advantaged personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, business owners, retirees and their families.
For other articles written by Brendan Greenwood visit his Blog | GreenwoodWealth
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*Insurance solutions and related services are mentioned in this newsletter as part of comprehensive financial planning services only and are not available through Worldsource Securities Inc. Investments products and services are provided by Brendan Greenwood through Worldsource Securities Inc., sponsoring investment dealer and a Member of the Canadian Investor Protection Fund (CIPF) and of the Canadian Investment Regulatory Organization (CIRO).
Investing involves risk. Equity markets are volatile and will increase and decrease in response to economic, political, regulatory and other developments. The risks and potential rewards are usually greater for small companies and companies located in emerging markets. Bond markets and fixed-income securities are sensitive to interest rate movements. Inflation, credit and default risks are all associated with fixed income securities. Diversification may not protect against market risk and loss of principal may result. Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.
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