A lower-for-longer world
Despite low unemployment and steady economic growth in the U.S., which have historically led to higher inflation, pricing pressures remain subdued. Interest rates could remain low and even go negative, though we think this is unlikely in the U.S.
Investors should resist chasing yield in fixed income in a low-rate environment. Chasing yield can lead to adding lower-quality securities, which increases a portfolio’s exposure to credit risk.
In equities, investors should resist chasing performance. In a low-rate environment, higheryielding stocks become more attractive, but valuations are high relative to historical averages, suggesting a correction is possible
A better way to invest in a low-rate environment is to take a total return approach and remain diversified, while rebalancing regularly.
The Federal Reserve has reversed course on its target for short-term interest rates, as the trade war and other concerns have clouded the picture for economic growth. Outside the U.S., economic activity has been decelerating, leading to rate cuts by more than 30 central banks so far in 2019. In the U.S., federal funds futures are pricing in even more rate cuts, as global risks encroach on U.S. growth. So it feels like we’re entering a new low-yield environment worldwide.
While this environment has helped fuel returns in both equities and fixed income, it may also present pitfalls. Investors who chase yield and performance may take on unintended risk. They may also inadvertently undermine the ability of their fixed-income holdings to buffer equity market volatility. Schwab’s Tom Hagstrom asked three of the firm’s investment professionals—Brett Wander, Jonas Svallin, and David Kastner—to share their thoughts about the new low-rate backdrop and what it might mean for investors.