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Where do we stand in a higher interest rate environment?

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By Michael O’Connor

You may have noticed that financial media have an unhealthy obsession with interest rates, but our fear of higher rates is justifiable for the most part.

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Higher interest rates impact markets in several ways.

From a financial perspective, the future cash flows of a company are discounted by interest rates; therefore, higher interest rates mean a lower present value of future cash flows.

It’s simply ‘A bird in the hand is worth two in the bush’ situation. Higher interest rates mean the money companies are forecasting they will make in the future is now worth less in today’s terms once higher interest rates/inflation have been considered.

From a relative value perspective, the equity risk premium is reduced. The equity risk premium is the extra returns over the risk-free rate that investors expect to receive given the higher risks they are taking by investing in the stock market versus the risk-free rate.

If we consider US Government Treasury bills as the risk-free rate, then as the interest rates being offered on these T-Bills increase, the hurdle rate equities need to beat to justify the additional risk being taken also increases.

The interest rate on one-year Treasuries just a year ago was 0.07%, so stocks were the obvious choice versus an asset that offered zero returns. But the 1-Year Treasury Rate has jumped 60x in under a year to over 4%.

In investing, everything is a relative choice, so as interest rates increase in risk-free assets, equities become less compelling versus their risk-free counterpart.

The questions become, why take on the extra risk of the stock market when I can get a guaranteed 4% from a risk-free asset?

This reduction in the equity risk premium can lead to an outflow from equities into more risk-averse fixed-income products. This reduction in demand for stocks can result in lower valuations over time.

From an economic perspective, higher interest rates will increase the cost of credit.

Higher interest rates make loans more expensive for both businesses and consumers. As a result, everyone ends up forgoing upcoming projects or spending more on interest payments.

This reduces the demand side of the economy by reducing the supply of money in circulation, leading to lower inflation (in theory) and weaker economic activity.

This slowdown in consumer spending will reduce business activity and negatively affect company earnings.

And as company earnings fall, so too do the prices people are willing to pay to invest in these companies.

So where do we stand now that we are in a higher interest rate environment?

Market Outlook

Inflation remains persistent, and as such, interest rates look set to increase further, creating less than favourable economic conditions.

But whether the economic outlook is good or bad is never the question we are trying to answer as investors.

The only question that matters is how much of this negative news is already priced into the market.

With the S&P 500 currently down 23% YTD, it appears that a mild recession has already been priced in.

The possibility of a deep recession is still very much on the table as inflation persists. Still, as data continues to soften, we see encouraging signs that inflation may have peaked.

You’ll never time the markets perfectly, and short-term risks remain, but the long-term expected returns of the stock market have improved dramatically in recent months.

I, for one, am long-term bullish on the stock market. These current prices make it an attractive time to build out my long-term positions.

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Festive jumpers and a Kerry jersey brings fundraiser to €10k

By Michelle Crean Jumpers have helped to raise almost €10k so far – but now it’s a very special jersey which could drive the fundraising numbers up! A Kerry football […]

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By Michelle Crean

Jumpers have helped to raise almost €10k so far – but now it’s a very special jersey which could drive the fundraising numbers up!

A Kerry football jersey signed by the 2022 All-Ireland winning team is up for grabs via a fundraising link once a donation is made to the Presents for Palliative fundraiser.

On Friday eight local schools including Holy Cross Mercy, Killarney Community College, Presentation Monastery, Lissivigeen, St Brendan’s College, St Brigid’s, St Francis Special School, and St Oliver’s
swapped their uniforms for their most colourful festive gear with funds going to help the amazing services in the Palliative Care Unit/Kerry Hospice Foundation.

“The day took place across the schools involved last Friday (December 2) and looks like it has been a success,” teacher Elaine Moynihan from St Brendan’s College told the Killarney Advertiser.

“The donations from the schools are still being counted but students look to be on their way towards making their goal of €10k.”

The iDonate ‘Fundraising For Kerry Hospice Foundation’ has been very helpful in this regard, she added.

“Anyone who donates via the link and leaves their name will be in with a chance to win a Kerry jersey signed by the 2022 All-Ireland winning team which will be presented to them before Christmas by a couple of members of the team.

“This was organised by the students involved in the fundraiser as a way to say thanks, and give back, to the members of the community who have gotten involved in the event – the link is live until December 18 and the draw will be made the following day.”

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Killarney punter secures €50,000 in EuroMillions draw

A lucky Killarney punter got an early Christmas present when they scooped €50,000 in the EuroMillions ‘Ireland Only Raffle’. The winning ticket, sold in the Lidl supermarket on the Tralee road, was […]

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A lucky Killarney punter got an early Christmas present when they scooped €50,000 in the EuroMillions ‘Ireland Only Raffle’.

The winning ticket, sold in the Lidl supermarket on the Tralee road, was valid for Tuesday night’s special draw.

The Killarney winner was one of 10 who each secured the €50,000 windfall.

“The National Lottery can reveal that three players in Dublin, three players in Cork and one player in Kerry, Roscommon, Kildare and Wexford all scooped the special raffle prize which was the seventh of 12 draws in the National Lottery’s ’12 Draws of Christmas’ promotion,” said a National Lottery statement.

The eighth draw will take place tonight (December 9) where 10 more players are guaranteed to win the amazing prizes.

Meanwhile, a player in Belgium scooped the EuroMillions Jackpot prize worth an astonishing €142,897,164.

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