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Visualizing the 200-Year History of U.S. Interest Rates

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History of U.S. Interest Rates

us interest rates

This Markets in a Minute Chart is available as a poster.

Visualizing the 200 Year History of U.S. Interest Rates

U.S. interest rates will stay near zero for at least three years as the Federal Reserve enacts measures to prop up the economy.

But are low interest rates a new phenomenon? Interestingly, one study by the Bank of England shows that this pattern of declining interest rates has taken place globally since the late Middle Ages. In fact, it suggests that these downward-sloping rate trends have taken place even before modern central banks entered the scene—illustrating an entrenched, historical trend.

This Markets in a Minute chart from New York Life Investments tracks the history of U.S. interest rates over two centuries, from the creation of the first U.S. Bank to the current historic lows.

U.S. Interest Rates: Historic Highs and Lows

What are the highest and lowest rates throughout history?

Prior to today’s historically low levels, interest rates fell to 1.7% during World War II as the U.S. government injected billions into the economy to help finance the war. Around the same time, government debt ballooned to over 100% of GDP.

Fast-forward to 1981, when interest rates hit all-time highs of 15.8%. Rampant inflation was the key economic issue in the 1970s and early 1980s, and Federal Reserve Chairman Paul Volcker instigated rate controls to restrain demand. It was a period of low economic growth and rising unemployment, with jobless figures as high as 8%.

YearAverage Interest Rate*Year OpenYear CloseAnnual % Change
20200.9%1.9%0.7%**-65.1%
20192.1%2.7%1.9%-28.6%
20182.9%2.5%2.7%11.8%
20172.3%2.4%2.4%-1.6%
20161.8%2.2%2.4%7.7%
20152.1%2.1%2.3%4.6%
20142.5%3.0%2.2%-28.6%
20132.4%1.9%3.0%70.8%
20121.8%2.0%1.8%-5.8%
20112.8%3.4%1.9%-42.7%
20103.2%3.9%3.3%-14.3%
20093.3%2.5%3.9%71.1%
20083.7%3.9%2.3%-44.3%
20074.6%4.7%4.0%-14.2%
20064.8%4.4%4.7%7.3%
20054.3%4.2%4.4%3.5%
20044.3%4.4%4.2%-0.7%
20034.0%4.1%4.3%11.5%
20024.6%5.2%3.8%-24.5%
20015.0%4.9%5.1%-1.0%
20006.0%6.6%5.1%-20.6%
19995.7%4.7%6.5%38.7%
19985.3%5.7%4.7%-19.1%
19976.4%6.5%5.8%-10.6%
19966.4%5.6%6.4%15.2%
19956.6%7.9%5.6%-28.8%
19947.1%5.9%7.8%34.5%
19935.9%6.6%5.8%-13.0%
19927.0%6.8%6.7%-0.2%
19917.9%8.0%6.7%-17.0%
19908.6%7.9%8.1%1.9%
19898.5%9.2%7.9%-13.2%
19888.9%8.8%9.1%3.5%
19878.4%7.2%8.8%22.1%
19867.7%9.0%7.2%-19.7%
198510.6%11.7%9.0%-22.1%
198412.5%11.9%11.6%-2.3%
198311.1%10.3%11.8%14.1%
198213.0%14.2%10.4%-25.9%
198113.9%12.4%14.0%12.5%
198011.4%10.5%12.4%20.3%
19799.4%9.2%10.3%12.9%
19788.4%7.8%9.2%17.6%
19777.4%6.8%7.8%14.2%
19767.6%7.8%6.8%-12.2%
19758.0%7.4%7.8%4.9%
19747.6%6.9%7.4%7.3%
19736.9%6.4%6.9%7.6%
19726.2%5.9%6.4%8.8%
19716.2%6.5%5.9%-9.4%
19707.4%7.9%6.5%-17.5%
19696.7%6.0%7.9%27.9%
19685.6%5.6%6.2%8.1%
19675.1%4.7%5.7%22.8%
19664.9%4.6%4.6%-0.2%
19654.3%4.2%4.7%10.5%
19644.2%4.1%4.2%1.7%
19634.0%3.8%4.1%7.5%

*Indicated by 10-Year Treasury Yields, a prime mover of interest rates
**As of September 28, 2020
Source: Macrotrends

Over the last year, interest rates have dropped from 2.1% to 0.9%, a 65% decrease. Rates are now below 1945 levels—and well under 6.1%, the average U.S. interest rate over the last 58 years.

Longer Horizons

Interest rates in the 18th and 19th centuries also provide illuminating trends.

After falling for three decades at the turn of the century, interest rates stood at 4% in 1835. That year, president Andrew Jackson paid off the U.S. national debt for the first and only time in history, as debt was seen as a “moral failing” or “black magic” in his eyes.

One consequence of this was the government sold swaths of land to finance the federal budget, ultimately avoiding the accumulation of debt. It didn’t last for long. The influx of land sales led to a real estate bubble and eventually, the economy fell into a recession. The government had to borrow again and rates ticked higher over the next several years.

Similarly, after the Civil War ended in 1865, data shows that interest rates also witnessed a long-term, negative slope, which ended in 1945. It then took 100 years for interest rates to exceed the highs of the Civil War era.

Why So Low For So Long?

While the exact reasons are unclear, broad structural forces may be influencing interest rates.

One explanation suggests that higher capital accumulation could be a factor. Another suggests that modern welfare states, with their increased public spending, have as well. For instance, average expenditures of total GDP in the UK averaged 35% between 1981 and 1960, compared to 8% between 1700 and 1750.

Along with this, rates usually have cycles that last between 22 and 27 years. When cycles shift from rising to falling rates, a quick reversal typically takes place. This was seen in 1982, when interest rates dropped 25%—from 14.2% to 10.4%—in one year. However, a different trend can be seen when falling rates switch to rising trends. These reversals typically average 2-14 years.

As near-zero rates seem more likely for the extended future, market distortions—such as ultra-low income yields—may become more commonplace. In turn, investors may want to rethink traditional asset allocations between fixed income, equities, and alternatives.

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Markets in a Minute

Which ESG Risks Are Affecting Your Portfolio?

It’s important for investors to identify which sustainability issues they’re most exposed to. Find out more in this breakdown of ESG risk by industry.

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Visualizing ESG Risk by Industry

Aging populations, climate change, and data security are some of the world’s most pressing issues, but what theme do they all share? For investors, the answer is certain: sustainability.

Sustainability is a concept that’s quickly moved into the mainstream, and is best described as the consideration of environmental, social, and governance (ESG) factors when analyzing companies. Combining these non-financial metrics with traditional analysis has been proven to have a positive influence on long-term returns.

In this Markets in a Minute chart from New York Life Investments, we’ve mapped the ESG risk profiles of four prominent industries to gain a better understanding of the sustainability issues they’re likely facing.

Fossil Fuels

Investors in this sector have substantial exposure to all three ESG risks, with environmental issues being the most significant.

RiskImportanceIssues to Consider

Environmental

High
  • The global transition to green energy
  • Stricter environmental regulations
  • Harm from spills and other accidents

Social

Medium
  • Strained community relations
  • Shifting consumer attitudes

Governance

Medium
  • Shareholder transparency
  • Risk management structure

The global transition to renewable energy paints a complex future for the sector, though it’s uncertain when oil demand will peak—predictions range from 2025 all the way to 2040. Nevertheless, market participants are taking action. To date, over 1,200 institutional investors representing $14 trillion in assets have made commitments to divest from fossil fuels.

Social risks are another source of uncertainty, especially as public awareness around climate change increases. A planned expansion of the Keystone Pipeline System, referred to as Keystone XL, has faced nearly a decade of public resistance and currently remains blocked by the U.S. Supreme Court.

Last but not least are governance risks. With many investors considering the switch to a fossil fuel-free portfolio, shareholder transparency will be of utmost importance. The onus will be on company management to demonstrate that they have a clear understanding of the risks and opportunities ahead. Royal Dutch Shell, the world’s fourth largest oil company, has made progress on this front by announcing its strategy for achieving net-zero emissions by 2050.

Financials

Social and governance risks are the top priorities for investors in the financial sector. Firms that finance the fossil fuel industry may have indirect exposure to environmental risks.

RiskImportanceIssues to Consider

Environmental

Low
  • Indirect exposure to the fossil fuel industry

Social

Medium
  • Aggressive or deceptive selling practices
  • Client relations


Governance

Medium
  • Corporate governance
  • Executive compensation

Underpinning the strength of the financial sector is consumer trust and client service. By using aggressive or deceptive selling practices, firms risk severe reputational damage and even financial penalties. Wells Fargo, America’s fourth largest bank, was recently fined $3 billion for its account fraud scandal that emerged in 2016.

These issues are closely related to governance risks, where weak internal structures can allow fraudulent activities like money laundering to take place. In fact, over a 15 month period ending in 2019, global banks were fined $10 billion for engaging in the activity. Experts believe that 60% of laundering fines resulted from criminals slipping past screening systems.

Healthcare

Social risks are the top concern for healthcare investors, given the sector’s important role in public health and well-being.

RiskImportanceIssues to Consider

Environmental

Low
  • Chemical activities

Social

Medium
  • Product safety and recalls
  • Inappropriate or misleading marketing

Governance

Low
  • Patient privacy

Unsafe products are one the most clear-cut issues because they directly harm society and shareholders. Johnson & Johnson, one of the world’s largest healthcare companies, has faced thousands of lawsuits for failing to warn consumers about asbestos in its baby powder products. The company was recently ordered to pay $2.1 billion in damages by a Missouri appeals court.

The use of inappropriate advertising is another issue that investors may want to watch out for. In 2019, Mundipharma was fined by the Australian government for making inaccurate statements in its marketing materials for opioids.

Software & IT Services

Companies in this sector are exposed to various social and governance risks, but are not known to be large polluters.

RiskImportanceIssues to Consider

Environmental

Low
  • Operation of data centers

Social

High
  • User privacy
  • Data security

Governance

Medium
  • Shareholder structure
  • Antitrust disputes

Many firms in this industry collect and monetize user data, exposing their shareholders to data privacy and security risks. Facebook has been at the center of numerous controversies in recent years, including the Cambridge Analytica scandal, which saw the unconsented collection of personal data from 87 million users. Polls found that 44% of Facebook users viewed the platform more negatively after the scandal.

These risks are likely to be amplified as governments take a firmer stance on data regulation. In 2018, the EU implemented its General Data Protection Regulation (GDPR), one of the world’s toughest privacy and security laws. In certain cases, noncompliance with the GDPR can result in fines equal to 4% of a company’s global revenues.

Navigating an Uncertain Future

Global sustainability issues are creating a more challenging environment for businesses in all types of industries. To hedge these risks, investors are turning to ESG in massive numbers—the value of sustainably managed assets now sits at $40.5 trillion, nearly double the amount from four years ago.

It’s important to remember, however, that businesses are unique. A social issue affecting one industry may not be as relevant for another. When armed with this knowledge, investors will be able to make more informed decisions that strengthen the long-term resiliency of their portfolios.

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Markets in a Minute

U.S. Dollar Performance After U.S. Elections

How much influence do elections have? We show U.S dollar performance after U.S. elections to illustrate there’s no clear trend between the two.

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U.S. Dollar Performance After U.S. Elections

News outlets often draw correlations between U.S. elections and market performance. In turn, some investors opt for more conservative portfolios until the election uncertainty is overcome. But how much influence do elections really have?

In this Markets in a Minute from New York Life Investments, we show U.S. dollar performance after U.S. elections to illustrate that there is no clear trend between the two.

What is the U.S. Dollar Index?

To start, we used the U.S. Dollar Index to track performance, which measures the U.S. dollar relative to a basket of six currencies.

CurrencyWeight
Euro57.6%
Japanese Yen13.6%
British Pound11.9%
Canadian Dollar9.1%
Swedish Krina4.2%
Swiss Franc3.6%

Source: Intercontinental Exchange

Any changes in these respective currencies can affect the performance of the U.S. dollar.

Post-Election Performance

For each U.S. election from 1988 to 2016, we calculated the U.S. dollar index’s percentage change since election day. Changes were tracked over the course of a year, or 250 trading days.

There was no clear trend in U.S. dollar performance after U.S. elections. Here’s another look at the data, this time showing the range in changes over the year and percentage change at the end of the period.

U.S. Dollar Performance After U.S. Elections

The U.S. dollar finished up in four years, and down in the other four years. The years after the 1988, 1996, and 2008 elections saw the largest fluctuations in values.

In 1989, the U.S. dollar surged due to three factors:

  • High interest rates, which attracted foreign investment
  • Political instability in West Germany and Japan
  • Strength of American stock and bond markets

In the period after the 1996 election, the dollar climbed again. While foreign currencies collapsed amid the Asian financial crisis, the U.S. economy enjoyed rapid growth and was seen as a safe haven for investors.

On the flip side, the U.S. dollar saw significant declines in the year after the 2008 election. The European Central Bank lowered rates in response to the global financial crisis, raising confidence in the euro and causing the U.S. dollar to fall.

What Investors Can Focus On

In each case above, significant movements were caused by macroeconomic factors, rather than the outcome of the U.S. election.

Here are a few factors that can have a direct impact on market performance:

  1. Inflation decreases the value of a dollar over time. Investors should consider how prevailing interest rates compare to inflation, and look for assets that build wealth over time.
  2. Unemployment rates have widespread impact. When unemployment is high, economic output and consumer spending are reduced.
  3. Economic growth signals healthy demand, and may boost corporate profits and drive up asset prices.

While elections can cause investors to change their asset mix, it’s important for investors to focus on long-term, broader factors that directly influence the market.

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