In our last article, we gave recommendations of actions to take, in preparation for potential turbulence in financial markets; something we see as inevitable. As promised, for this article, we discuss four contributing factors that can bring about this quake of financial instability in the US and the global economy: Low Unemployment Rates, Tightening Monetary Policy, and the combination of Rising Interest Rates/Inflation along with the Declines in Stock Market Performance.
Low Unemployment Rates
The unemployment rate in the US has fallen to its lowest since 1969 with December marking the sixth consecutive month of unemployment below 4% (http://bls.gov). Although this may sound like good news regarding the current state of the economy, this gives the Federal Reserve the green light to raise interest rates; this in turn makes borrowing money more costly. No one wants to be in the position of paying back debt especially when lenders want higher interest payments from the principal. The US economy along with the global economy are in rehabilitation from injury as negative interest rates return to normal rates.
Tightening Monetary Policy
Before the financial crisis in 2008, the federal reserve was consistently raising interest rates and the economy came to a halt due to that very fact: interest rates were too high. In response to the global financial crisis of 2008, interest rates in the US were set very low, nearly to zero. This encouraged consumers and businesses to borrow and spend money at low interest in order to prop up the economy. As the economy recovered, the federal reserve decided that interest rates should be raised, causing firms and individuals to get nervous. Why is this the case you ask? Elevated interest rates make borrowing money more costly and makes it harder for borrowers to pay off debt when lenders require higher interest payments from the initial money they lent you. The increase in interest rates causes pessimism about the economy and leads to a decrease in sales. The US economy along with the global economy, are slowly recovering from negative interest rates back to normal rates.
Rising Interest Rates/Inflation and the Declines in Stock Market Performance
The stock market has awaken from its ominous slumber from volatility throughout 2018.
Due to this, stocks had essentially wiped out their gains for 2018 with some major indices such as the Russell 2000 even slipping into a brief bear market territory. There are many culprits and blame to go around for the move downward in stocks and the retreat in the climb of interest rates such as the trade war between the US and China, Brexit and the willingness to raise interest rates by the Federal Reserve. We advise that you hope for the best but we are here to help you prepare for the worse.
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