For more than a decade, investors have enjoyed supportive financial conditions. The Federal Reserve (Fed) has provided clear forward guidance, their balance sheet has expanded, and interest rates have remained low. For businesses, this has been an era of easy money for new projects, expansion, and mergers and acquisitions (M&A). For everyday individuals, rates on mortgages and personal loans have been attractive, boosting home prices and debt levels. All in all, this has driven a long period of steady economic growth and healthy returns.
However, with the Fed now raising policy rates, inflation at multi-decade highs, and renewed geopolitical risks, investors will need to adjust to tighter financial conditions. Not only could this affect economic growth rates as the cost of borrowing rises, but it could also directly impact market valuations. If (or when) this occurs, there will be less room for error and a greater need for investment discipline in the years to come.