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Markets and economy

2024's high interest rates: A bumpy road to a brighter future

9 minute read
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January 19, 2024
Markets and economy
Economic outlook
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Interest rates
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George F. A. Pastino

Senior Financial Advisor

George F. A. Pastino

George F. A. Pastino

George Pastino is a senior financial advisor in Vanguard Personal Advisor®, where he serves as a financial planner for managed clients. His advice ranges from portfolio management and spending strategies to legacy and continuity planning. George joined Vanguard in 2004 and served in a variety of customer service positions before moving to Vanguard's advice department in 2015. He earned a B.S. in business administration with a concentration in finance from Shippensburg University. He holds FINRA Series 7 and 63 licenses and is a Certified Financial Planner™ professional.

Interest rates increased dramatically in 2023, and they're not expected to come back down anytime soon. While that means it's more expensive to borrow money, it also means it's more rewarding to save money. This change is ultimately a good thing for the economy, but it can take some time to get used to. As an investor, be sure to read our 2024 outlook. It can help you navigate the road ahead and understand what that might mean for your spending and saving strategies.

Key takeaways from Vanguard's economic and market outlook for 2024

Our projections for the year ahead consider how the interest rate environment will evolve and reveal a few more things to watch out for in 2024, which are highlighted in this article. If you'd like to review the detailed analysis, read the full report: Vanguard economic and market outlook for 2024: Global summary.

You may also visit this page to learn more about the global outlook and gain insight from an interview featuring Joe Davis, Vanguard's global chief economist.

Higher interest rates: Implications for households, businesses, and investors

Today's higher interest rates are a significant development with far-reaching effects on households, businesses, and investors. Here are the key concerns for each group.

Households

Higher interest rates will continue to make it more expensive to finance debt such as mortgages and car loans. This may lead to a reduction in borrowing activity and a shift toward more prudent financial management.

Higher rates also present investors with an opportunity to earn more on their savings than they have in years. As returns on savings accounts and fixed income investments rise, families can build their financial reserves more effectively.

Businesses

Businesses also face higher costs to borrow money. This may affect their investment decisions and potentially slow down expansion plans. Businesses with strong foundations will be better equipped to absorb the increased costs and maintain their growth and trajectory.

Investors

Interest rates will remain high for the foreseeable future, and that's a positive development for long-term investors. It provides a more stable and predictable foundation for risk-adjusted returns over time. However, the transition isn't complete.

As rates continue to adjust, investors should anticipate some level of volatility in the financial markets. Maintaining a long-term focus and staying the course, rather than reacting to the market's day-to-day fluctuations, will serve investors well.

Let us help you navigate a world of higher interest rates. Learn more about our personalized advice services.

Learn more

Monetary policy is expected to tighten

The global economy has shown remarkable resilience in 2023 despite facing numerous challenges, driven by a less-restrictive monetary policy than initially predicted.

Looking ahead to 2024, we anticipate a gradual tightening of monetary policy. This could lead to a mild economic slowdown in the U.S., which is necessary to bring inflation back to target levels. The important thing is to maintain a long-term perspective amid any downturns. Making sudden investment changes based on inflation corrections won't help you achieve your long-term financial goals.

We recommend our clients stick to the time-tested strategies proven to help them achieve the best results. Through our advice services, we can help you see what that long-term perspective will look like on a personal level based on your unique financial situation.

Bonds are back

The bond market has undergone a significant transformation over the past 2 years, reflecting the shift to a new era of higher interest rates. While this transition has led to some volatility, it's a positive development for long-term investors for several reasons:

  • Bond valuations are now more attractive, with long-term rates aligning with the higher neutral rate of interest—the rate at which policy is neither expansionary nor contractionary.
  • Term premia—the compensation investors require for bearing the risk that interest rates may change over the bond's maturity term—have increased due to inflation concerns and economic uncertainty.
  • Long-term bond investors can expect higher returns, ranging from 4.7% to 5.8% annually over the next decade.
  • The 60/40 portfolio, a traditional asset allocation strategy, has a stronger probability of achieving its long-term return objectives.
  • The prices of investment-grade bonds remain reasonable, but the prices of high-yield bonds are higher. 

 

Overall, the rise of interest rates marks a positive shift toward sound monetary policy, paving the way for long-term economic stability and growth.

Exploring opportunities in smaller markets

Because higher interest rates make it more expensive for companies to borrow money, they generally affect corporate profits and stock prices. As a result, we've lowered our expectations for U.S. stock market returns to 4.6%–6.2% annually over the next 10 years.

However, there are still some equity opportunities for investors. Small-cap stocks and stocks in developing markets are both attractively priced right now. Additionally, we believe the U.S. dollar is overvalued, which means there could be opportunities to invest in foreign stocks.

Overall, we believe investors should take a more defensive approach to investing in the current environment. This means focusing on investments less sensitive to interest rate changes, such as bonds and dividend-paying stocks.

Let's navigate this bumpy road together

While adjusting to the high-interest-rate world, it can be tempting to make impulsive financial decisions based on your emotions. However, a financial advisor can help you stay on track by providing objective advice and helping you make sound decisions. Vanguard's advice services can partner with you to navigate uncertain markets together and help you achieve your financial goals.

Take control of your financial future in a high-interest-rate world. Learn more about our advice services. Give us a call at 800-742-9998.

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All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline. High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.

Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks.

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