The Federal Reserve’s plan to curtail its massive asset purchase program has triggered heightened market volatility. Higher long-term interest rates, and the prospect of further rate rises down the road, have resulted in ongoing outflows from bonds. Some investors have shifted their assets toward cash alternatives, accepting near-zero yields in exchange for perceived safety. While stocks have been on an upward trajectory since the recession, uncertainty over whether the economy can sustain the equity bull market has kept many investors from participating in the ascent.
The outlook for the economy and interest rates has significant implications not just for fixed income, but for other assets within the highly interwoven global economy. Even though the Fed is likely to keep short-term rates low for some time, investors may want to reevaluate their asset allocation and investment strategies, and how they can position themselves to meet their goals for income, growth and capital preservation in a normalized rate environment.