Saturday, May 30, 2020

Negative Interest Rates And The Impact On Investor Investment Choices

One phenomenon investors face today is the fact central banks around the world have moved to a negative interest rate posture. Earlier this month Federal Reserve Chairman, Jerome Powell, stated the U.S. Federal Reserve is not considering moving the Fed Funds Rate to a negative level though. Yet, rates in the U.S. are near zero with the Fed Funds target rate at .25% or 25 basis points. A one month U.S. Treasury Bill yields just under 13 basis points. In other words, rates are near zero and going to a negative level is not out of the realm of possibility. One recent article notes if the Fed does push rates to a negative level it will do so in a meaningful way, maybe as low as minus 100 basis points or minus one full percentage point. What are the implications of negative rates if this were to be realized?

Understanding the implications of negative interest rates are important due to the impact on the investment choices facing investors. One of the better explanations of negative interest rates comes from former University of Windsor professor, Mark Meldrum, PhD. I am paraphrasing from some of his comments taken from the below video, but understanding negative rates provides insight into what is occurring in the equity market today. Importantly, if the Fed or Central Banks around the world for that matter, pursues a negative rate policy, understanding negative rate implications allows an investor to be positioned where one wants to be before you need to be there. An overarching conclusion from the video is the fact low rates/yields on cash and bonds are forcing investors into riskier investments like stocks and alternatives. One conclusion he makes though, and it is his opinion, is yes stock are expensive on an absolute basis, but on a relative basis they are not. Understanding how interest rates play into these investment choices is important and makes viewing the below video worthwhile.

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