What Investors Can Expect in a Rising Interest Rate Environment

October 12, 2022 | by V. Henry Astarjian | Posted in Blog

The media have said much lately about the new cycle of rising interest rates initiated by the Fed. A great deal of the media’s narrative has concluded that a dire scenario awaits both the economy and the investment markets at the end of these rate increases. That viewpoint is understandable, though off the mark. When the road ahead looks foggy and impassable, our natural tendency is to  worry.  

My reading of the situation is less gloomy and more focused on prospects for the longer term. Once the Fed has finished its interest rate increases over the coming months, and we have made our way through the current stock and bond market downturns, our investment prospects are likely to remain positive.

More specifically, over the course of 2022 and 2023 we could see the following chain of events  where:

• The Fed raises interest rates in an effort to lower inflation;
• The U.S. economy slips further into recession and unemployment rises;
• Corporate sales and earnings growth decelerates;
• Stock and bond markets decline below their recent lows;
• Inflation reaches the Fed’s 2% target sometime in 2023;
• The Fed ceases interest rate increases and eventually switches to a cycle of interest rate reductions in order to revive the economy;
• Stocks and bonds become more reasonably valued;
• Investors find improved long-term buying opportunities once again; and finally,
• The stock and bond markets start a new bull cycle. 

This is one possible scenario for the economy and the markets. Its timeline may be shortened to early 2023, or it may be stretched into 2024. It all depends on how events play out and what the Fed does. Overall, envisaging the broad possibilities is a useful exercise for understanding what may lie ahead, and may help to lift some of the fog that clouds the road ahead. As with all predictions on complex human events, this scenario is not cast in stone and is subject to change. 

(Excerpted from Waterstone’s October, 2022 investment letter, “The Price of Cheap Money” https://waterstoneadvisorsllc.com/the-price-of-cheap-money/)

Disclosures: Waterstone Advisors, LLC is a Massachusetts registered investment advisor. Registration with securities authorities does not imply a certain level of skill or training. Investing carries risk of loss, including loss of principal. The information and data presented in this note have been compiled from publicly available sources that are believed to be reliable. However, their accuracy is not guaranteed. Waterstone Advisors LLC does not guarantee the performance of the securities or strategies discussed or analyzed in this note. An investment in these securities or strategies may result in complete loss of principal. For additional information and disclosures, please see our ADV Part 2 (the “Firm Brochure”) in the Our Approach page of our website at www.waterstoneadvisorsllc.com, or contact us at 978-828-2188.