With the latest Wells Fargo/Gallup Investor and Retirement Optimism Index holding steady near its 16-year high, Brian Rehling of Wells Fargo Investment Institute explores rising interest rates and their impact on investors.
Q: While investor optimism held steady near its 16-year high, this is the first quarter since 2016 that the index didn’t increase. Have we reached the peak?
I don’t think that investor optimism has peaked for this cycle. Typically, investor optimism peaks near or just after economic growth and equity markets peak. We look for the economy to continue to improve and for stocks to hit new highs over the next 12-18 months. That investor optimism did not increase again is likely the realization that the market optimism over President Trump’s election was premature.
Q: How can investors protect themselves and their portfolios in times of uncertainty?
Investors often focus on fears resulting from the current news cycle. While these events do impact day-to-day movements in the markets, they generally don’t have a lasting impact on economic growth. From a fixed-income perspective, one of the bigger threats to investors’ portfolios over the coming months is the Federal Reserve’s ability to get monetary policy right. A monetary policy mistake could lead to a premature end of the expansion or an increase in inflation. Without question, the best way to protect your investments from uncertainty is to own a well-diversified portfolio of both stocks and bonds.
Q: Most investors continue to say they prefer lower interest rates. Are low rates good or bad for investors?
Whether low interest rates are a positive likely depends on an investor’s perspective. Someone heavily invested in stocks would likely prefer a low-rate environment as cheap borrowing can help fuel earnings growth while keeping costs relatively low. For investors in retirement looking to generate income from their portfolio, however, low rates are actually a significant headwind affecting income.
Q: Should we be concerned that debt levels have reached $12.7 trillion, and are low interest rates a factor?
While debt levels have grown, we must remember that the overall economy has grown as well. When looking at debt relative to the economy, levels are more reasonable and not overly concerning for the economy at this time. While low rates help investors feel more comfortable with their debt load, the driving factor in this sentiment is most likely low unemployment and a healthy economy.
Q: What’s your forecast for interest rates?
We look for rates to move modestly higher over the next year as economic growth improves. The Fed is slowly increasing rates, but we must remember that rates are still relatively low. For the longer term, there are many structural headwinds that should help support a low-rate environment including increasing debt, an aging demographic, and low productivity.
Q: With rates slowly rising, what should investors do differently?
While everyone’s situation is different, in general, investors that are just starting out with a long time horizon have the ability to take on more risk and have high allocations to equities. As you near retirement, you generally have less tolerance for volatility and risk, so we see a shift into bonds. In this low-rate environment, some retirees have taken more risk to generate portfolio income than may be appropriate. In these cases, we recommend that clients work with an investment professional to reassess their overall financial plan.
For more investment insights, see the Wells Fargo Investment Institute site on wellsfargo.com.
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