Deep Knowledge Investing: Higher for Longer – Again
After over a decade of zero or near-zero interest rates, it’s all starting to change. Rates are now over 5 percent, their highest level in nearly 15 years. So are other costs, such as car payments and mortgage rates.
That likely won’t change anytime soon. After seeing inflation jump up to 40 year highs after the pandemic, central banks are working to fight inflation. They may even be willing to cause a recession to do so.
The good news? The economy has so much debt to it that we likely won’t see rates move too much higher. The bad news? The economy has so much debt that higher rates could lead to lower economic output for years to come.
That fits in well with the view that inflation is likely to stay higher for longer.
For investors, that leaves a few key takeaways. First, for stock investors, focus less on trading and more on long-term trends. That includes companies that can raise prices faster than inflation without losing profitability.
It also means investing in tech companies with a strong idea, such as the growth of AI. Flying cars or other high-tech concepts make sense at zero percent interest rates. But not when the cost of capital is 5 percent or higher.
It could also mean higher bond returns for longer as well. Investors may have overlooked fixed income during the boom years with such low rates. But that’s changed too.