The bond market is the latest “crisis du jour”
There is no shortage of commentary about rising interest rates, the Federal Reserve, and what investors should do next. Much of it either follows the market’s latest move or predicts an investment doomsday scenario.
The reality is a quarter-point interest-rate increase may have less economic impact than many expect. Higher rates typically slow the economy through rate-sensitive areas such as housing and durable goods. Yet housing and autos are already under significant pressure:
• Housing affordability is near record lows
• The average payment on a new 30-year mortgage is approximately $2,918 per month
• Mortgage purchase applications remain very low
• 45% of consumers say high rates and tight credit make this a bad time to buy a home
• The K-shaped economy is not working for most consumers, and higher rates do nothing to help the asset-light individuals trying to buy a first-time home.
At the same time, business investment, especially investment connected to AI technology and productivity, should continue to support economic growth. Artificial intelligence and productivity improvements will likely place downward pressure on inflation, and higher rates will have little impact on the AI buildout.
The takeaway is not to ignore the bond market. It is to avoid allowing the latest media headlines to dictate a long-term investment plan.
Before making a major change to your investment strategy, turn off the television and revisit your goals, time horizon, cash-flow needs, and tolerance for risk.
Markets change quickly. A thoughtful financial plan should not.
This material is for educational purposes only and is not investment advice. Investing involves risk, and individual circumstances vary. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Source: US Housing Outlook, Sept 20206, Apollo Global Management