Last Wednesday the Federal Reserve decided to raise US interest rates by 0.25% and guided towards a “gradual” pace of future increases.
Investors have thus far welcomed the decision, choosing to focus on it being a sign of US economic strength rather than mourning the beginning of the end of the era of near-zero borrowing costs that have prevailed since the global financial crisis. This is perhaps not surprising given that it is possibly the most talked about and well-flagged rate rise in history.
Looking forward, a standalone 0.25% rate rise is unlikely to have a significant effect on the US economy. What is now of greater concern to investors is the pace of future rate rises. Interestingly, the market is pricing in interest rates of 1.25% in the US by the end of 2017, whereas Federal Reserve projections imply the central bank will raise them at twice this speed, with up to four 0.25% hikes next year. In contrast, economists expect no move in the UK rate until late 2016.
Whilst the broad macro-economic landscape is interesting, it is very difficult to have economic insights that can consistently be translated into outperforming investment strategies. By the time economic patterns have been recognised they have typically already changed or dispersed. Long-term investors are therefore best served spending their time finding strong companies that look capable of generating attractive returns through the cycle, have strong management (a good management team can navigate through a difficult economic background, while a poor one can get it wrong in a strong economy), and are not over-valued.
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