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Chart: Interest Rates Fall Decades After Pandemics

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This infographic is available as a poster.

Real Interest Rates After Pandemics

Real Interest Rates

This infographic is available as a poster.

Chart: Interest Rates Fall Decades After Pandemics

How have interest rates responded to pandemics?

Despite higher interest rates on the horizon, historical data shows that real interest rates fall decades after pandemics end. Real interest rates were shown to decline as much as 1.5% lower, even after an initial rise.

In this Markets in a Minute chart from New York Life Investments, we show how pandemics have impacted real interest rates across 19 pandemics since the 14th century.

Pandemics and Real Interest Rates

According to a working paper from the San Francisco Federal Reserve Bank, pandemics have lasting effects on real interest rates.

Real rates were defined as the level of returns on safe assets issued from global financial powers.

Specifically, interest rates were constructed by weighting real interest rates on long-term debt by each country’s share of GDP. Data was collected over seven centuries for pandemics with over 100,000 deaths across Europe due to available historical records.

To study how interest rates respond to major economic events over the long run, pandemics were compared to wars.

Changes in Real Rate0 Years10 Years20 Years30 Years40 Years
Pandemics-0.1%-0.6%-1.3%-1.0%-0.7%
Wars-0.1%0.3%0.8%0.8%0.5%

Based on their research, interest rates fell slightly after pandemics, but this effect increased over time. What’s more, four decades after pandemics ended, real interest remained lower than pre-pandemic levels. By contrast, interest rates increased after wars, hitting the highest point two to three decades out.

What factors may have impacted a depression in real rates after pandemics?

An abundance of capital per unit of labor was one possible factor. Higher levels of precautionary savings was another, which may be a result of rebuilding lost wealth during the pandemic. According to economic theory, increased savings and a slowing population can lead real interest rates to decline.

In other words, when there is excess capital and people are saving money, there is less demand for credit. This decreased demand, in turn, may lead to lower interest rates.

By contrast, capital is destroyed during wars, which may have caused an upward pressure on rates in the past.

Pandemics vs. Recession Savings

How do savings during pandemics compare to recessions? In April 2020, personal savings rates skyrocketed to over 33%—the highest ever recorded.

In the table below, we show the peak savings rate during the pandemic, and compare it to different recessions.

DatePeak Savings Rate
Apr 202033.8%
May 20097.9%
Sep 20017.0%
Jan 19919.3%
Nov 198113.2%
Jul 198011.2%
Dec 197314.8%
Jul 197013.5%
Jan 196111.1%

Source: U.S. Bureau of Economic Analysis (Jan 2022)

At one point, savings rates during the COVID-19 pandemic were double or triple the rate of past recessions. The average U.S. personal savings rate over the last 60 years is around 9%.

Rise in Real Wages

Like interest rates, real wages showed a meaningful response to pandemics. As labor scarcity increased, real wages rose higher. Overall, pandemics corresponded with a rise in real wages that lasted for decades. For wars, real wages decreased persistently for years.

During the Black Death, for instance, a 25-40% decline in the labor supply corresponded with a 100% rise in real wages.

Changes in Real Wages in Great Britain0 Years10 Years20 Years30 Years40 Years
Pandemics0.5%3.6%8.0%10.2%11.8%
Wars-0.2%-1.3%-2.2%-2.2%0.1%

It’s worth noting that the study was released in June 2020, long before current wage rises began to appear.

Productivity Increases

Pandemics have also positively impacted productivity. While real GDP per capita rose 8.6% four decades after pandemics, for wars, productivity increased just 1.4%.

Changes in Real GDP per Capita in Great Britain0 Years10 Years20 Years30 Years40 Years
Pandemics0.1%1.7%4.6%4.3%8.6%
Wars0.1%-1.0%-0.7%0.5%1.4%

Why did productivity improve? As the number of workers declined, capital per worker increased, raising labor productivity. In other words, there was more capital available for the remaining workers, boosting productivity.

By contrast, wars have hurt productivity due to the destruction of physical capital such as public infrastructure.

What if COVID-19 Is Different?

Two caveats may impact how real interest rates respond to the current pandemic, according to the research.

In the past, pandemics created a significant dent in the labor force. COVID-19, in comparison, has a greater impact on an elderly demographic in terms of deaths, who are less likely to be in the workforce. As a result, the decrease in capital to labor could depress interest rates to a lesser degree.

Secondly, the fiscal response to COVID-19 is much larger than past pandemics. A major fiscal response could lead to higher debt levels, which in turn could push real interest rates higher. As the central bank prints more money, this could lead to inflation, which causes bonds to be worth less. In turn, investors begin selling bonds and yields rise.

World War II: A Modern Day Case Study

However, there is a case to be made for lower rates for longer.

In the aftermath of World War II, the Federal Reserve sustained low borrowing costs in spite of a soaring economy and high inflation. The central bank kept long-term Treasury yields at 2.5% after the war to stabilize markets and keep government debt financing low. Even amid high debt levels, the debt-to-GDP ratio declined without causing damaging effects on the economy.

Overall, if history repeats itself, there could be a low interest rate environment for a significant period of time, with sustained effects on real wages and productivity.

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Markets in a Minute

How Small Investments Make a Big Impact Over Time

Compound interest is a powerful force in building wealth. Here’s how it impacts even the most modest portfolio over the long-term.

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This bar chart shows the power of compound interest and regular contributions over time.

How Small Investments Make a Big Impact Over Time

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

Time is an investor’s biggest ally, even if they start with just a modest portfolio.

The reason behind this is compounding interest, of course, thanks to its ability to magnify returns as interest earns interest on itself. With a fortune of $159 billion, Warren Buffett largely credits compound interest as a vital ingredient to his success—describing it like a snowball collecting snow as it rolls down a very long hill.

This graphic shows how compound interest can dramatically impact the value of an investor’s portfolio over longer periods of time, based on data from Investor.gov.

Why Compound Interest is a Powerful Force

Below, we show how investing $100 each month, with a 10% annual return starting at the age of 25 can generate outsized returns by simply staying the course:

AgeTotal ContributionsInterestPortfolio Value
25$1,300$10$1,310
30$7,300$2,136$9,436
35$13,300$9,223$22,523
40$19,300$24,299$43,599
45$25,300$52,243$77,543
50$31,300$100,910$132,210
55$37,300$182,952$220,252
60$43,300$318,743$362,043
65$49,300$541,101$590,401
70$55,300$902,872$958,172
75$61,300$1,489,172$1,550,472

Portfolio value is at end of each time period. All time periods are five years except for the first year (Age 25) which includes a $100 initial contribution. Interest is computed annually.

As we can see, the portfolio grows at a relatively slow pace over the first five years.

But as the portfolio continues to grow, the interest earned begins to exceed the contributions in under 15 years. That’s because interest is earned not only on the total contributions but on the accumulated interest itself. So by the age of 40, the total contributions are valued at $19,300 while the interest earned soars to $24,299.

Not only that, the interest earned soars to double the value of the investor’s contributions over the next five years—reaching $52,243 compared to the $25,300 in principal.

By the time the investor is 75, the power of compound interest becomes even more eye-opening. While the investor’s lifetime contributions totaled $61,300, the interest earned ballooned to 25 times that value, reaching $1,489,172.

In this way, it shows that investing consistently over time can benefit investors who stick it through stock market ups and downs.

The Two Key Ingredients to Growing Money

Generally speaking, building wealth involves two key pillars: time and rate of return.

Below, we show how these key factors can impact portfolios based on varying time horizons using a hypothetical example. Importantly, just a small difference in returns can make a huge impact on a portfolio’s end value:

Annual ReturnPortfolio Value
25 Year Investment Horizon
Portfolio Value
75 Year Investment Horizon
5%$57,611$911,868
8%$88,412$4,835,188
12%$161,701$49,611,684

With this in mind, it’s important to take into account investment fees which can erode the value of your investments.

Even the difference of 1% in investment fees adds up over time, especially over the long run. Say an investor paid 1% in fees, and had an after-fee return of 9%. If they had a $100 starting investment, contributed monthly over a 25-year time span, their portfolio would be worth over $102,000 at the end of the period.

By comparison, a 10% return would have made over $119,000. In other words, they lost roughly $17,000 on their investment because of fees.

Another important factor to keep in mind is inflation. In order to preserve the value of your portfolio, its important to choose investments that beat inflation, which has historically averaged around 3.3%.

For perspective, since 1974 the S&P 500 has returned 12.5% on average annually (including reinvested dividends), 10-Year U.S. Treasury bonds have returned 6.6%, while real estate has averaged 5.6%. As we can see, each of these have outperformed inflation over longer horizons, with varying degrees of risk and return.

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What Were the Top Performing Investment Themes of 2023?

In 2023, several investment themes outperformed the S&P 500 by a wide margin. Here are the top performers—from blockchain to AI.

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The Top Performing Investment Themes in 2023

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

While the S&P 500 rebounded over 24% in 2023, many investment themes soared even higher.

In many ways, the year was defined by breakthrough announcements in AI and the resurgence of Bitcoin. At the same time, investors looked to nuclear energy ETFs thanks to nuclear’s growing role as a low carbon energy source and the war in Ukraine.

This graphic shows the best performing investment themes last year, based on data from Trackinsight.

Blockchain ETFs Lead the Pack

With 82% returns, blockchain ETFs outperformed all other themes in the U.S. due to the sharp rise in the bitcoin price over the year.

These ETFs hold mainly bitcoin mining firms, since ETFs investing directly in bitcoin were not yet approved by regulators in 2023. However, as of January 2024, U.S. regulators have approved 11 spot bitcoin ETFs for trading, which drew in $10 billion in assets in their first 20 days alone.

Below, we show the top performing themes across U.S. ETFs in 2023:

Theme2023 Performance
Blockchain82%
Next Generation Internet80%
Metaverse59%
FinTech54%
Nuclear Energy50%
Cloud Computing49%
AI/Big Data49%
Gig Economy48%
Digital Infrastructure & Connectivity43%

As we can see, next generation internet ETFs—which include companies focused on the internet of things and new payment methods—also boomed.

Meanwhile, nuclear energy ETFs had a banner year as uranium prices hit 15-year highs. Investor optimism for nuclear power is part of a wider trend of reactivating nuclear power plants globally in the push towards decarbonizing the energy supply. In fact, 63 new reactors across countries including Japan, Türkiye, and China are planned for construction amid higher global demand.

With 49% returns, AI and big data ETFs were another top performing investment theme. Driving these returns were companies like chipmaker Nvidia, whose share price jumped by 239% in 2023 thanks to its technology being fundamental to powering AI models.

Top Investment Themes, by Net Flows

Here are the the investment themes that saw the highest net flows over the year:

Theme2023 Net Flows
Robotics & Automation$1,303M
Nuclear Energy$997M
AI/Big Data$987M
Global Infrastructure$734M
Net Zero 2050$716M
Blockchain$357M
Cannabis & Psychedelics$270M
Emerging Markets Consumer Growth$203M

Overall, ETFs focused on robotics and automation saw the greatest net flows amid wider deployment of these technologies across factories, healthcare, and transportation actvities.

The success of AI large language models over the year is another key factor in powering robotics capabilities. For instance, Microsoft is planning to build a robot powered by ChatGPT that provides it with higher context awareness of certain tasks.

Like robotics and automation, AI and big data, along with blockchain ETFs attracted high inflows.

Interestingly, ETFs surrounding emerging markets consumer growth saw strong inflows thanks to an expanding middle class across countries like India and China spurring potential growth opportunities. In 2024, 113 million people are projected to join the global middle class, seen mainly across countries in Asia.

Will Current Trends Continue in 2024?

So far, many of these investment themes have continued to see positive momentum including blockchain and next generation internet ETFs.

In many cases, these investment themes cover broad, underlying trends that have the potential to reshape sectors and industries. Going further, select investment themes have often defined each decade thanks to factors like technological disruption, geopolitics, and the economic environment.

While several factors could impact their performance—such as a global downturn or a second wave of inflation—it remains to be seen if investor demand will carry through the year and beyond.

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