This month the HiddenLevers team will be discussing Rising Rates and exploring why it’s important to look beyond the Federal Funds Rate. Here are some pressing questions we will address:
- How vulnerable are Fixed Income investments to changes in interest rates right now?
- Do rate hikes really impact the performance of the stock market and housing?
- Why is it not good enough to just back-test asset classes?
Discover our Rising Interest Rates scenario and discuss how Stress Testing can add value to your client relationships.
Why is the WarRoom important? HiddenLevers economic research is used to create scenarios for stress testing (like crash testing a car). Our interactive stress tests and client-facing reports help financial advisors + professionals better understand risk in their client’s portfolios. Helping financial professionals illustrate risk + return tradeoff and stay ahead both financial markets and competitors. Capture client risk tolerance, communicate complex topics with ease and win more business with HiddenLevers.
Despite never ending calls for a bond crash, Yellen’s first couple of moves on interest rates have not destroyed the bond market. In fact, in the past six months, interest rates for 10 year US treasuries have nearly doubled while the US Aggregate Bond Index has been almost flat.
With renewed worries around inflation is a bond Armageddon on the horizon? Or will 2017 prove to be another year of rising rate fears eclipsing reality? Perhaps both theories are wrong and the next market correction will come from changing trade policy or infrastructure spending. The team at HiddenLevers has compiled an exclusive analysis of these issues and more in this month’s WarRoom on Rising Interest Rates.
With a lot of potential outcomes and ideas out there, we tried to group the ideas into the good (best-case), the neutral (mid-case), and the ugly (worst-case).
The Good: Driven by Growth
What if strong economic growth prompts the Fed to keep raising rates, bringing interest rates up 2-3%?
- With unemployment down and inflation tame, the Fed has yet to deviate from its rate hike intentions
- A slow, steady stream of rate hikes won’t necessarily impact the market short term
- Rising rates could compress margins at leveraged businesses like utilities and other high-yield plays
The Bad: Driven by Wage Growth
What if the economy is nearing the top of the business cycle, and wage gains keep the Fed on a path of steady rate increases?
- Rising wages at the end of the business cycle could pressure S&P earnings growth, leaving equity markets relatively flat
- This scenario models a period of sideways movement for markets, as the economy digests rising rates and a rebalance between wages and corporate profits
- Flat yield curve
The Ugly: Driven by Commodities Inflation
What if rising inflation forces the Fed to raise interest rates rapidly, resulting in an inverted yield curve?
- An unexpected rise in inflation could force the Fed to accelerate its tightening of monetary policy
- Rate hikes forced by inflation would have negative impacts for both equities markets and bond markets
Interested in stress testing this scenario today?! Click here if you are a current client. Not a client and want to test drive HiddenLevers + see how your clients will be impacted in this scenario, click here.