Investing when interest rates are low
In its Dec. 18 statement, the Federal Reserve Board’s open market committee affirmed its support for keeping short-term interest rates near zero for the foreseeable future. Bob Landaas and Brian Kilb talk about how that low-rate environment affects investors in a MONEY TALK VIDEO.
Brian: So Bob, if the corporate earnings side of things looks good, where are interest rates going, and how do we fold that into strategies for stocks in the months ahead?
Bob: You know, Brian, I think it’s important to point out that inflation just doesn’t appear one day on your door step, that it takes a while for it to percolate. There are only three ways for inflation to pick up:
- It’s because of wages.
- It’s because of higher commodities prices.
- And the third is because of capacity issues in corporate America.
None of them suggest higher inflation down the road.
This is important for stock investors because without a lot of inflation, or I should say hardly any inflation, it’s unlikely that interest rates are going to go up quickly anytime soon. And as a result, that supports higher multiples for stock prices. So it’s possible in a low interest rate environment to have higher P/E ratios in the stock market supporting stock prices.
Brian: So if we summarize things, we have valuations which are reasonable. We have a low interest rate environment. It seems like we’re going to be in that for a long time. Corporate earnings which are decent if not maybe even a little better than we’d hoped down the road. It sounds like positive news for the stock market. Where do we go in terms of strategy for asset balancing in our portfolio?
Bob: Well, the difficulty in a low rate environment is that you’re not going to make a lot of money on bonds.
You don’t want to abandon a portfolio of bonds. It is your safe money. You’re concerned about the return of your money as well as the return on your money.
And I think the focus for most folks is to stay in the stock market and understand that growth stocks are doing well right now. Keep that balance between value and growth.
And stay focused on the fundamentals that we talk about of earnings, of interest rates, of inflation. That’s what drives stock prices. So much that people hear and want to respond to is really peripheral noise, and I think it’s important to focus on the fundamentals.
Brian: I always like to tell people to remember why they have different types of assets in their portfolio: Bonds for safety, in this case; stocks for growth. If you keep that in mind, it will help you get through these volatile periods.
Bob Landaas is president of Landaas & Company.
Brian Kilb is executive vice president and chief operating officer at Landaas & Company.
Money Talk Video by Peter May
(initially posted Dec. 20, 2013)
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