The beginning of 2024 has presented a new landscape to investors. The past decade of ultra-low interest rates is gone. However, some valuations suggest that investors anticipate a continuation of seemingly endless growth. Today, we face a landscape characterized by higher equity valuations and higher interest rates. These conditions are creating a new tightrope that investors must walk as they navigating today’s markets.
The past decade has been good to many equity investors. Much of this growth may have been fueled by low borrowing costs and quantitative easing programs. This has pushed valuations, measured by metrics like price-to-earnings (P/E) ratios, to near-record highs across many asset classes. This has been particularly notable among technology companies.
Meanwhile, the Federal Reserve, aiming to combat inflation, has raised interest rates significantly. The goal of these hikes has been to increase borrowing costs and “slow the economy”. Historically, this has been a step that is taken to fight inflation. Higher interest rates have also historically dampened investor enthusiasm for riskier assets like stocks, as bonds become more attractive with rising yields.
So here are some things that investors should keep in mind as they navigate todays markets. Prepare for potential corrections, especially in growth stocks that are more sensitive to interest rate changes. Value stocks, which have been overshadowed by growth stocks for much of the past decade, might be making a comeback. Companies with strong fundamentals, stable earnings, and reasonable valuations could outperform in this environment. So, don’t put all your eggs in one basket. Spread your investments across different asset classes, including stocks, bonds, real estate, or commodities, to mitigate risk.
Remember also that the impact of rising rates may not be uniform across all sectors or regions. Some industries might be more resilient than others. Also, geopolitical tensions and economic uncertainties can further add to the volatility. Stay informed about global events and their potential impact on your investments but do not overeact to the latest news. Finally, don’t underestimate the power of dividends. Companies with consistent dividend payouts can provide a buffer against market fluctuations and offer a steady stream of income.
It may help to speak to a financial professional. By understanding the current investing landscape and making informed decisions, you can turn these challenges into opportunities and continue to build your wealth over the long term.
Michael French
Head of Investments at 49 Financial
