Relentless Rate Rise Continues | The Investors Edge

By John Stewart
Chief Investment Officer at Farmers Trust Co.

Week in Review: Relentless Rate Rise Continues

Longer-term interest rates continued to rise at an accelerating pace this past week, with the 10-year rate hitting 5.3% for the first time in nearly 20 years.

A short seven months ago, the 10-year rate was below 4%.

Obviously, higher long-term rates drive mortgage prices higher, but they also raise the cost of capital across the entire economy.

As everyone competes for capital, especially with all the AI infrastructure spending that’s going on, the rising price of money starts to squeeze businesses across the board.

All things equal, higher interest rates push valuations for all financial assets lower – including, of course, stocks.

For now, the markets have been holding up quite well, all things considered.  However, we’re probably getting pretty close to the point where bigger downside surprises are possible.

Featured Insight: Get Ready to Harvest

For farmers, fall is the time for harvesting their crops.  For investors, the fourth quarter is a good time to harvest tax losses.

Even with another strong year for stocks, it is likely a well-diversified portfolio will have at least a couple of losers that can be sold to realize losses for tax purposes.

Most people are reluctant to take losses, but you have to remember that you don’t have to make your money back on the same stock that you lost it on.

For one, you can sell one company at a loss while buying a similar company for future upside – for example, if you have a loss on Pepsi, you could sell it while at the same time buying an equal size position in Coke.

This is a strategy that can be especially helpful if you’re looking to lock in some gains on stocks that have done well and you need a way to offset the tax consequences.

Looking Ahead: An Election Approaches

We always counsel our clients not to make investment decisions based on political biases, and that remains sound advice.

Nevertheless, elections can create some short-term market volatility.

Midterm election years tend to be more challenging and come with higher than average volatility – we’ve certainly seen a bit of that over the past couple of months.

One interest stat, however – once a midterm election is over, market returns are pretty darn good historically – the fourth-quarter of a midterm election year followed by the first and second quarter of the following year have averaged roughly 20% returns for the S&P 500 cumulatively over those nine months.

One exception?  The midterm election of 2018 during President Donald Trump’s first term.  The S&P fell 20% in the fourth quarter that year.