I received a few panic phone calls two weeks ago about the fall in the stock market. “Should I sell everything right now?” was the most common question. While I am not a registered investment adviser, there are some general comments that I can provide.
The U.S. economy has been performing so well lately that inflation is starting to tick upward for the first time in a decade. (Increasing inflation prompts bond investors to require a higher interest rate. Bonds have an inverse relationship to interest rates. The price of a bonds falling is the equivalent of interest rates rising). In the last two weeks, price indexes have been rising, which is an indicator of future inflation, so bond prices have fallen to reflect higher interest rates. (In addition, this makes it more difficult for stock prices to rise. This is because the interest rate used to discount future company earnings into a company’s stock valuation goes up as well, putting downward pressure on stock prices).
Rather than write a primer about bond and stock investing and the impact of interest rates, suffice it to say that: as interest rates rise, bonds will fall and stocks will have a tougher time advancing. Interest rates are rising across the yield curve (2 year, 5 year, 10 year, and 30 year bonds). So anything interest-rate related will likely have a higher rate going forward. This would include: mortgages, car loans, credit cards, but also savings accounts and bank certificates of deposit.
As interest rates rise, you may want to consider reducing your allocation to bond funds and possibly your stock funds to lock in some of the gains over the last several years.