LIRA: Low Interest Rates Addiction LIRA: Low Interest Rates Addiction
Have we been suffering/benefiting from Low Interest Rates Addiction – or “LIRA” – for too long? This week, the US Equity Markets dropped notably, with the DOW down 832 points (3.1%) to and the S&P 500 down 3.3%, its 5th consecutive session of decline and longest losing streak in almost 2 years. The trend rippled overnight to Asian and European markets and futures show more drops ahead.
Most attribute the slide to a slow but steady rise in super-low interest rates. Those who saw the connection between cheap money and market volatility have been predicting the correction for some time.
When put in perspective the drop seems scary, but a slightly longer look back, reminds us that equity markets have soared over the past three years with the Nasdaq up about 35% from 3 years ago, even after this week’s drop.
According to the FED, you should expect to see more rate hikes over the coming 12 months in response to solid indicators of low unemployment, rising inflation and economic growth. The big picture may be better than you think.
The long view can also help: In the middle of 1981, a 30-year fixed rate mortgage was around 18.45%. Today it sits around 4.63%. The low was around 3.35% in 2012.
So as much as these rate hikes can be a bit alarming and cause notable equity market corrections, try to view them as the normalization of unrealistic rates rather than the headlines that speak of SOARING rates.
Buyers and sellers get jittery around these market corrections, but corrections in any market are an inevitability when markets soar. It is always best to pause and watch before drawing any big picture conclusions.