|
|
June 15, 2001/Sivan 24, 5761, Vol. 53, No.37
Lower interest rates affect individuals
LEE C. EISINBERG
Special to Jewish News
In the first quarter of 2001, the Federal Reserve cut the benchmark federal funds target rate four times, each time by a half point. The Fed took these actions to stimulate the economy. However, you're an individual - not an economy. So how will the rate cuts benefit you?
As a borrower, you might find that lower interest rates could help you significantly. For example, you may be able to refinance your home at a lower rate. Or, if you have credit-card balances or other types of consumer loans, you may be able to save money with lower interest payments.
In short, it's pretty clear how lower interest rates can help you as a consumer. But how about as an investor? What will lower interest rates mean to you as you plan your investment strategy?
In general, falling interest rates are good for stocks. Lower interest rates make it easier for companies to borrow - and thus expand their operations. That's why the stock market typically rallies after interest rate cuts.
Of course, not all stocks will benefit equally from interest rate reductions. And it's impossible to predict which individual stocks will respond most favorably. However, some market sectors have traditionally done better in an environment in which rates are declining. For example, 12 months after the Fed's initial interest rate reductions in 1990, 1995 and 1998, technology stock prices had increased, on average, 58 percent. Using these same criteria, financial services stocks were up 32 percent, health-care stocks were up 31 percent and consumer cyclicals (such as auto companies) were up 25 percent. At the low end of the scale, utility stocks had risen just 5 percent.
Should you start loading up on stocks within the sectors that did well following rate cuts? Not necessarily. When choosing stocks, you may want to factor in the possible effects of interest rate reductions, but you still have to look at a company's fundamentals, such as management strength and product competitiveness. Plus, look at the stock's valuation. If its price-to-earnings ratio is high, then you'll be paying a big premium just for the prospect of future earnings.
Finally, you always have to make sure your portfolio is properly diversified, with a mix of stocks, bonds and government securities. And you'll still need to choose investments that fit your risk tolerance and your time horizon. These basic principles of long-term investing will always be important - no matter which direction interest rates are heading.
Lee C. Eisinberg is an investment executive at Dain Rauscher in Phoenix. The opinions expressed are Eisinberg's and do not necessarily reflect those of the firm. Dain Rauscher is a member of the NYSE and SIPC. Eisinberg can be reached at 602-508-7863 or toll free at 1-888-595-4166.
|
