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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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Top 10 Essential tips for Leaving Cert Students in lead up to June 5

The final weekend leading up to the Leaving Cert exams can be very tough, as you try to balance last minute revision with much needed rest after a long, exhausting […]

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The final weekend leading up to the Leaving Cert exams can be very tough, as you try to balance last minute revision with much needed rest after a long, exhausting year.

The natural anxiety felt by students is often heightened by the annual media hype around the state exams and it is really important that you do your best to manage that stress effectively, so that you are ready to perform to the best of your ability once the exams start. The following tips may help to keep you focused and a little calmer in the lead up to June 5.

1. Review, don’t cram – Focus on summary notes, flashcards, or mind maps. This reinforces what you’ve already studied. Prioritise areas where you feel less confident, but don’t try to learn new material.

2. Practise past papers – Review marking schemes and time allocation for each question you will need to answer on each paper. Practise a sample of questions against the clock. This will maximise your scoring potential.

3. Organise your materials – Check the exam timetable and highlight your own exams. Prepare the stationary that you need, gather pens, pencils, calculators, and so on. Pack your bag the night before to avoid last-minute stress.

4. Maintain a healthy balance – Aim for 8 hours of sleep each night. Proper rest is crucial for memory, concentration and stamina. Eat well, include proteins, healthy fats, and complex carbs in your meals to maintain energy levels. Drink plenty of water, hydration is essential.

5. Try to manage stress – Schedule short breaks during study sessions and do something enjoyable and relaxing, like a short walk, playing or listening to music. Get fresh air and some light exercise. Use relaxation techniques like breathing exercise, mindfulness and meditation.

6. Focus on a positive mindset – Focus on your strengths and remind yourself of your preparation. Concentrate on what you know and not on what you think you don’t! Try to avoid negative self-talk and steer clear of discussions that heighten anxiety, such as comparing how much you’ve studied with friends.

7. Plan your weekend – Create a realistic timetable for the weekend, balancing study sessions with breaks and relaxation and don’t overdo the study. You need plenty of energy for the exams.

8. Stay connected – Talk to friends and family, if you are feeling overwhelmed reach out and get support from loved ones. If it’s helpful, have a short, focused study session with friends to clarify doubts.

9. Keep things in perspective – The Leaving Cert is important but won’t define you and regardless of what happens you have several options open to you. Try to reframe the media hype as the whole country getting behind you, for what they know to be a tough time for you.

10. Get Set for exam day – Double-check the venue, seating arrangements, and required materials for the day of the exam. On the evening before the exam, do a light review of key concepts but avoid heavy studying. Ensure you know how to get to the exam venue and plan to arrive early (at least 30 mins on the first day). Decide what you’ll wear to avoid rushing in the morning and have your water and snacks ready to go.

Above all else, give the exams your best shot! Once they are over you have a lovely ‘study-free’ summer and bright future to look forward to. Go n-éirí libh ar fad, the very best of luck to each and every one of you!

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Disability toilets for Killarney Library

Works to build new toilet facilities for people with disabilities should commence later this year. Cllr Marie Moloney tabled a motion at a recent Kerry County Council meeting. She said: […]

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Works to build new toilet facilities for people with disabilities should commence later this year.

Cllr Marie Moloney tabled a motion at a recent Kerry County Council meeting.
She said: “Application has been made for funding to the Department. As soon as the funding is approved, work will commence on the provision of Disabled Toilet Facilities.
“While ramps are installed for accessibility, it is unacceptable that any public building be without disabled toilet facilities in this day and age.
“I am aware of several people with a disability who constantly use the services of the Library and are very happy with the staff and the services that Killarney Library offers but are disappointed at the lack of disabled toilets.”
“I will be keeping the pressure on to have these facilities provided as soon as possible.”

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