In the July 27th meeting, the Fed decided to leave interest rate unchanged but said that near term risks to US economy have diminished. But the GDP numbers that came out on Friday suggests to us that a rate hike will likely not occur till 2017. The GDP growth of 1.2% annualized rate in the first half could mean that Fed will likely stay away from doing anything in their September meeting and possibly in their December meeting as well. While an interest rate hike in early 2017 will depend largely on the continued expansion of US economy and job gains in second half of this year coupled with increase in household spending as well as global economic conditions, we believe investors need to rethink their investment strategy given that interest rates could remain low for the rest of the year.
What should investors do with their investments?
Rising interest rates are usually good news for real estate sector i.e. companies that benefit from home building, construction as well as financial stocks, that have under performed the market thus far. Insurers, too, would have benefited by earning higher returns on the premiums. Status quo on interest rate implies these sectors would be the ones to avoid. For fixed income investors, concern over bond values dropping with rise in interest rates, is now no longer a factor. At Future Wealth, we view the rest of the year playing out just like first half of this year. Yields from bonds and bank CDs and notes will remain low but volatility in the stock market will continue. As such, we continue to recommend shying away from international markets and instead holding high quality US company stocks and dividend paying ETFs with a possible rotation out of long term bonds into stocks as we near the end of the year.
CEO, Future Wealth LLC
Future Wealth, LLC is a registered investment adviser offering advisory services in the State of California and in other jurisdictions where exempted.The information contained in the report does not constitute an offer, or a solicitation of an offer, to buy or sell any securities or other financial instruments, including the securities of companies listed in the report. Investors should not rely solely on the information in the report in making an investment decision.