Any changes in interest rates, anywhere in the world, changes the value of financial assets.
Of course, this is blindingly obvious when you are looking at bond prices shifting, but the rule also applies to all other classes of financial assets, including equities, farmland, commercial and residential real estate or commodities.
Simply put, if interest rates are at 10% then the present value of each dollar you receive on any investment is much lower than when interest rates are at 2.50%.
Interest rates impact financial markets.
Famously, Warren Buffett, who knows a thing or two about investment markets, provided the empirical evidence for this in a speech in 2001.
He noted that in the 17 years between December 1964 and December 1981, the US Gross National Product (GNP) increased by a whopping 373%, yet the Dow Jones index essentially went absolutely nowhere, from 874.12 to 875.00.
A major driver for this was that long-term bond rates ran from 4.20% in 1964 to an eye-watering 13.65% by 1981.
In the next 17 years from December 1981 to December 1998, GNP in the US only increased by less than half as much at 177%, yet the Dow Jones went on a bonanza run from 875 to 9,181.43, a truly staggering increase.
Why? Largely because interest rates altered the landscape for financial assets by falling from 13.65% to 5.09%, and this changed the way people invested their money.
We're seeing it happen again now, with rock bottom interest rates in the US firing the Dow from below 7,000 to well above 16,000 since the financial crisis.
Given that investors must contend with inflation, and with interest rates at rock bottom, bonds and fixed interest investments have about-faced as an investment choice from offering "risk free return" to practically guaranteeing "return free risk".
A decade of low rates
You didn't have to be a genius, then, to work out that very low interest rates across the globe would cause a shift in the way people invest their money.
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