Keeping watch on interest rates and market activity
By David Royal
Interest rates play an important role in the economy and market activity, so we keep a close eye on them. For 2020, the Federal Reserve (or “Fed”) appears to be on the sidelines. The Fed sets short-term interest rates, but the market sets longer-term interest rates. The Fed raised rates a total of nine times from 2015 through December of 2018.
In the fourth quarter of 2018, the markets were anticipating economic weakness, which would usually result in lower interest rates. But the Fed was still raising rates. When market conditions and Fed policy are heading in opposite directions, we tend to see increased volatility in the stock market and, of course, we saw a huge drop in December of 2018.
The Fed then reversed course and began cutting rates in 2019, which turned out to be a great year for stocks. Following its most recent rate cut last fall, the Fed indicated that it likely would hold rates steady for some time. Chairman Jerome Powell has stated that in order to raise rates, inflation would have to run above the Fed’s 2% target for an extended period of time. However, the Fed’s preferred measure of inflation has been well below 2% for many years.
In periods in which the market sees relative predictability in interest rates, stocks have tended to be less volatile. In the second half of 2019 and through the first part of 2020, we have had one of the longest periods in history without a 2% drop in the stock market. Periods of lower volatility can lead to complacency, however. In such periods it is especially important to stick to your long-term financial plan and not be lulled into taking on excessive risk, especially with the market near all-time highs.
David Royal is chief investment officer at Thrivent.
The views expressed are as of January 31, 2020, and may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product
Asset management services are provided by Thrivent Asset Management, LLC, a SEC-registered investment adviser and subsidiary of Thrivent Financial for Lutherans.