Investing in 2021 has so far been largely defined by market fears of inflation. Whilst the S&P/ASX 200 Index (ASX: XJO) has, on the whole, had a great year considering its year to date gains of around 9% and a series of recent new record highs, there has been a lot of volatility in between.
This is especially so in the tech shares sector. One of the root causes of this volatility has been fears of inflation, and the higher interest rates that come with it.
It's worth noting that both the Reserve Bank of Australia (RBA) and the US Federal Reserve (the Fed) have given strong indications that they don't see a case for interest rates going up before 2023 at the earliest. Even so, this hasn't stopped investors from speculating a far earlier rate rise. Or government bond yields essentially doubling over the past 6-7 months or so, which indicates that markets aren't entirely buying what the RBA and the Fed are selling.
Today, we have an interesting development along that line.
According to Bloomberg, the US Treasury Secretary (which is a rough equivalent to our Treasurer) Janet Yellen has stated that higher interest rates could be good for the US economy. In an interview, Secretary Yellen said that the Biden Administration should push ahead with its massive spending programs that are currently being proposed. Even if it results in inflation.
Here's some of what she told Bloomberg:
If we ended up with a slightly higher interest rate environment it would actually be a plus for society's point of view and the Fed's point of view… We've been fighting inflation that's too low and interest rates that are too low now for a decade.
What would higher interest rates mean for ASX shares?
Well, it's worth noting that if the US starts raising interest rates, our RBA would probably have to follow suit. And that would of course mean higher interest rates in Australia as well.
But how would this impact the share market? Well, interest rate rises are normally not conducive to higher share markets. Higher rates normally mean that 'risky' assets like shares lose some of their appeal in the eyes of many investors since term deposits and other 'safer' investments become more attractive. So while higher rates might be good for the economy, this probably won't translate into higher shares, at least in the short term.
But with interest rates at near-zero levels currently, there really is only one way they can go in the future. So perhaps that's what ASX investors should be preparing for right now. After all, the Fed and the RBA have both told us they are coming at some point. Whether that be in 2023, 2024 or even 2022 is the real question.
