Exclusive Content

    If you are a client, sign in below to access exclusive content.

     

    Last week was mixed for the markets, as the Dow increased by 0.44%, while the S&P 500 lost 0.06%, the NASDAQ dropped 0.13%, and the MSCI EAFE gave back 0.55%.1 We also saw a variety of data released, giving a similarly mixed view of recent economic activity. Retail sales and the Consumer Price Index showed modest gains, while industrial production and housing starts both declined.2

    The biggest headline from last week, however, was a development the market anticipated for quite some time: The Federal Reserve decided to raise its benchmark interest rates—for only the second time since 2006.3

    Why did the Fed raise rates?

    The Federal Open Market Committee (FOMC), the group of Fed officials who meet to determine interest rates and other policies choices, has a mandate to “foster maximum employment and price stability.”4 In its quest to uphold this mandate, the FOMC aims to keep inflation at 2%, as this level can help support accurate financial forecasting and decisions while preventing harmful deflation.5

    The act of adjusting interest rates can help control inflation and support economic strength. At its most basic, when the Fed lowers rates, they are indicating that the economy is contracting—and when they raise rates, they are indicating that the economy is growing.

    When describing her organization’s decision to raise rates this month to a range of 0.5 – 0.75%, Fed Chairwoman Janet Yellen said, “My colleagues and I are recognizing the considerable progress the economy has made. We expect the economy will continue to perform well.”6 The FOMC also said they may introduce three additional interest rate increases in 2017, up from their previous prediction of two raises.7

    In other words, the Federal Reserve believes our economy is on the right track and inflation may begin to rise. They are using the tool of interest-rate increases to help keep employment and inflation at healthy levels.

    How did the markets react to the interest rate increase?

    Overall, investors seemed to react reasonably to the interest rate increase. The VIX, a measure of expected volatility in the markets, increased by 4.6%—but it remains at low levels.8 In other words, the likelihood of great volatility seems slim.

    One area of the market, however, did not respond well to the Fed’s interest rate increase and inflation increase prediction: bonds. This summer, global bond markets experienced a rally in response to a variety of factors, including potential slowing economic growth worldwide. But since the U.S. election, the value of government debt has dropped by more than $1 trillion, as investors now expect greater inflation and a quickening economy.9 Essentially, the faster the economy and inflation grow, the less value that long-term government debt holds—contributing to the bond market’s recent losses.

    How could the rate increase affect you?

    Rising interest rates have both positive and negative effects for individuals. If you have money earning interest in the bank, you can expect to earn a slightly higher return. Conversely, if you borrow money—such as taking out a new mortgage or refinancing existing liabilities—your interest rate may be higher than before the Fed’s announcement.

    In addition, the interconnected relationships between equities, bond markets, and other financial vehicles will evolve as interest rates increase. These shifts can be much more complex, and we are here to help you stay on top of any changes and align your financial life with the current market environment.

     

    Sources

    1 2 3 4 5 6 7 8 9
    The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2014 Emerald Connect, LLC
    © Mahoney Asset Management

    INVESTING RISK DISCLOSURE
    Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Mahoney Asset Management for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

    IMPORTANT CONSUMER INFORMATION
    This web site has been prepared solely for informational purposes. It is not an offer to buy or sell any security; nor is it a solicitation of an offer to buy or sell any security.This site and the opinions and information therein are based on sources which we believe to be dependable, but we can not guarantee the accuracy of such information.

    Representatives of a broker-dealer or investment adviser may only conduct business in a state if the representatives and the broker-dealer or investment adviser they represent: (a) satisfy the qualification requirements of, and are approved to do business by, the state; or (b) are excluded or exempted from the state’s licenser requirements.

    An investor may obtain information concerning a broker-dealer, an investment advisor, or a representative of a broker-dealer or an investment advisor, including their licenser status and disciplinary history, by contacting the investor’s state securities law administrator.

    SECURITIES: ARE NOT FDIC-INSURED/ARE NOT BANK-GUARANTEED/MAY LOSE VALUE
    This information is intended for use only by residents of CA, CT, DC, FL,, MA, MD, MN, NC, NJ, NY, OH, PA, and VA. Securities-related services may not be provided to individuals residing in any state not listed above.

    The financial calculator results shown represent analysis and estimates based on the assumptions you have provided, but they do not reflect all relevant elements of your personal situation. The actual effects of your financial decisions may vary significantly from these estimates–so these estimates should not be regarded as predictions, advice, or recommendations. Mahoney Asset Managment does not provide legal or tax advice. Be sure to consult with your own tax and legal advisors before taking any action that would have tax consequences.

    Securities offered through
    Newbridge Securities Corporation,
    member FINRA / SIPC

    Investment Advisory Services offered through
    Newbridge Financial Services Group Inc.,
    an SEC Registered Investment Adviser.

    Office of Supervisory Jurisdiction
    5200 Town Center Circle, Tower One, Suite 306
    Boca Raton, FL 33486

    Toll-Free: 877-447-9625
    Phone: 954-334-3450
    Fax: 954-489-2390