What Negative Rates Mean To The Average Investor

What Negative Rates Mean To The Average Investor

AC Lens

While many financial investors are calling for interest rates to be lowered in the hope it will force the share market to rise, John Lonski, chief capital markets economist at Moody's Analytics, doesn't agree.

He says a drop in interest rates, especially to below zero will not instill confidence in the economy but will make the financial markets nervous, leading to a drop in borrowing and spending.

In theory, negative rates should make borrowing more attractive, both for consumers and businesses, however Lonski says if people think the economy is tanking, they may hold onto their money instead of spending it on goods and services.

"The mere talk of negative rates could discourage businesses and consumer from spending as much as they would," he says. "That could depress earnings."

Nick Nelson, head of global and European equity strategy at UBS, agrees and says another problem is that low rates have made stocks more expensive than their historical average, which means equities as an alternative to bonds is no longer attractive.  

"Many people are being pushed up the risk spectrum," he says. "The market is in a stretched situation, where bond like equities are trading at very expensive valuations."

"Dividends are considerably higher than what most companies can borrow at. If a company's cost of borrowing is lower than the dividend yield, then they could re-gear their balance sheets by issuing debt and buying back shares."

Lonski says "savers" would also be at a disadvantage in a negative-rate environment. "It's hard enough to make money in a savings account today, but if rates are effectively zero, then it will be impossible to generate any return on cash. That means that either people just won't be able to save enough or they'll have to take on more risk than they may like, he says.

If a negative rate financial environment was to prevail, Ashwin Alankar, Janus Capital Group's global head of asset allocation and risk management, says it would be advisable to hold more money in cash. He says if the U.S. goes rate negative, the global economy will be tossed into such uncertainty that investing money into anything else would be a risk.

"We're navigating waters we've never traveled on before," he says. "So it's not the best time to load up on risk. You might think that it would be stupid to say 'cash is king,' but cash is king when your other option is taking on too much risk in the markets and where there's no academic theory on what happens when rates go negative."

Alankar says "There's not a lot of historical evidence to learn from. We would have to see how it plays out."


Read this next:

Must Read

Harvard Online Education: What Have They Learned?

Harvard Business School launched HBX, its new online education initiative. Prior to HBX, the trend was for online courses to create a “lean ba...

SCHOOL'S OUT ! Online Degrees the New Alternative.

The online learning environment is continuously evolving, offering a fantastic opportunity to learn and grow. With increasing tuition costs, budget cuts and lim...

All the BEST credit cards, zero interest, rewards, cash back and more!

Although we all know about credit cards – and likely have multiple cards - what might be surprising is that there are a number of different types of credit ca...

10 Ways To Manage High Blood Pressure

High blood pressure is a common medical problem of the modern age. Today, eight out of ten people older than 60 suffer from high blood pleasure, nearly 40% of p...

Student Loans, what you need to know

For millions of people, college is not an option without some sort of financial aid to help pay for the ever-growing, exorbitant cost. Financial aid comes in ma...

Your Homeowners Insurance Premiums May Be Affected By Your Credit ScoreYour Homeowners Insurance Premiums May Be Affected By Your Credit Score

You probably know that the premiums for your homeowners insurance may increase when and if you file some sort of claim. But, what you may not know is that your ...

This Huge Company Is Harnessing Mindfulness In Its Employees

  While some businesses have gyms and cafeterias for their staff, cloud-based software company Salesforce is giving it employees the silent treatment. T...

Are Those In-Office Perks Really That Good?

Having your employer give you a rent subsidy instead of a pay raise may appear to be a pretty good deal on the surface, but it may not be the best thing for...

3 Big Budget Mistakes To Avoid

Budgeting is all well and good when you are trying to get your financial life into order, but many people just can't get the budget to stick. They fall vict...

5 Personal Success Books You Need To Read

[caption id="attachment_93" align="alignnone" width="1698"] Books HD[/caption] One of the easiest ways to succeed in any venture is to have a mentor you can ...

6 Reasons Why You Should Start A Savings Account Today

A recent survey showed that 40% of Americans do not have enough money squirreled away to see them through an emergency as small as an unexpected auto repair. ...

Tumblr Is Tumbling Yahoo’s Purchase Expectations Out The Door

Tumblr is proving not to be the cash cow Yahoo thought it was going to be , hinting it may write off the entire goodwill value it paid to purchase it. In...