Not a Positive Environment
The days of easy money are clearly over for now as the environment for interest rates worldwide has a positive bias.
In the United States, the Federal Reserve has increased the fed funds rate 17 consecutive times since June 2004 and has yet to officially end the rate increases. In Canada, interest rates have also been ratcheting higher as inflation concerns continue to prevail.
Recently, in what was a surprise and unexpected move, South Korea raised its benchmark interest rate by 25 basis points to a five-year high of 4.5% due to inflationary concerns.
In China, a country that is on fire with superlative Q1 GDP growth of 11.3%, there is pressure to increase interest rates in order to try to cool down the economy thereby and avoid inflation.
Over in Europe, news just came out that euro countries expanded at their fastest rate in six years. Projections call for GDP growth to beat the forecast of the European Central Bank. This, in turn, will force interest rates to rise.
The current trend of higher global interest rates will pressure economic growth and could lead to a slowdown in corporate profits. This scenario is not what global investors want to hear but it may just happen.
Stock markets in the United States may continue to languish going forward as evidenced by the declining returns in 2004 and 2005 and the poor results so far this year.
And, as global interest rates continue to rise and economies slow, we could see weakness spread to the high-flying markets in Asia and Latin America.
Oil prices, which are retrenching at this time due to an expected ceasefire in the Israel-Hezbollah conflict, will be a key factor in whether inflation creeps in and if the economy is impacted.
At this time, the environment for stocks does not look positive but should interest rates stop rising, it could help to prevent a slowdown of world economics.