For the last decade or so, investors have only known one thing: the zero percent interest rates, thanks to the Federal Reserve’s zero interest rate policies (ZIRP). Enacted during the depths of the Great Recession, the Fed – in order to get the economy moving – slashed interest rates to zero and left them there for what has felt like an eternity.
And while you can argue over whether it was helpful regarding jump-starting the economy, the low interest rates did cause the markets to surge.
With that, it’s understandable that the sheer thought of raising rates and ending the cheap supply of money would cause investors to freak out and send stocks lower. Except, that hasn’t happened. We’ve had several hikes now, and the markets have continued to rally. It seems the markets have brushed off higher rates, at least for now.
The question is whether this will continue.
Low Rates Drove Returns
One of the biggest narratives since the Great Recession has been the low rate environment. With the Fed keeping rates in the basement, investors of all stripes have been forced to look to other places outside of bonds for returns. Equities and, increasingly, dividend stocks and sectors like REITs, master limited partnerships have gotten the nod. Moreover, the low interest rate environment made it very easy to perform so-called carry trades or to borrow cheap money and invest elsewhere.