The old rules of money apply again, says HAMISH MCRAE

Higher for longer. That is the message from the markets over the past week.

Strong job growth in the US, sticky inflation in Europe, and even more so in the UK, will combine to force central banks to raise interest rates further around the world, and likely to keep them high for as long as possible. a time.

The markets did not like it. Bond yields have risen, with the 10-year US Treasury yield above 4%, and our 10-year government bonds near 4.75%. The returns for two-year and five-year gilts are even higher.

As for stocks, the FTSE 100 index had its worst day this year on Thursday and fell again on Friday. It’s been an awkward validation of the ‘sell in May and go’ rule, although in reality you would have done much better this year if you sold in April.

The main reason for the stock market pessimism is that markets now believe that central banks are prepared to push major economies into recession, if that is the price for inflation to return to the 2 percent target.

Higher bond yields make them relatively more attractive compared to stocks, and recessions (or even slower growth) are bad for corporate profits.

It’s not great news for mortgages, either. If our government has to pay nearly 5.5 percent in two-year gilts, a two-year mortgage will cost more than 6 percent. You and I may think that a British homebuyer’s creditworthiness is as good as Her Majesty’s Government, but I’m afraid that’s not what the markets see.

It was also an unfortunate time for the Center for Policy Studies to publish Retail Therapy, a paper that called for more retail investors to invest money in the stock market instead of leaving their cash on deposit. This is an important and valid issue, as over the long term, returns on stocks have been higher than those on fixed-interest investments like gilts, and much higher than cash.

Over the last 50 years, you would get a real return (adjusting for inflation) of 4.9% on UK equities, 3% on gilts and just 0.9% on cash. Over the past 10 years, it would have been 4.7% in equities, 1% in gilts and minus 2.5% in cash. Yet only 12 per cent of UK shares are owned by retail investors, compared to 50 per cent in the 1960s. Instead, we have £1.8 trillion in savings accounts, almost as much as the market capitalization of the FTSE 100.

At least it hasn’t done as badly for us as it has for pension funds and other institutional investors, who have relentlessly sold their shares over the last two decades, a scandal that we have drawn attention to in this newspaper and that the government is trying to stop. – as we report below.

But despite the financial case for more retail investment, and despite the fact that UK stocks are worth even better now that they’ve come off the top, encouraging people to invest more in stocks will be a long stretch.

There is an even broader problem here. We have to get past the message that the ultra-low interest rates of the last decade were unprecedented and probably will never happen again in our lifetimes. It was an experiment by central banks to boost economies without causing inflation, and it failed.

Now we will probably have a decade of interest rates that are higher than inflation, maybe quite a bit higher, and we need to prepare for that.

In practical terms, this means that the old rules apply again. One is that we should try to make our savings work for us.

The country as a whole is sitting on a huge pile of so-called excess savings, funds that accumulated during the pandemic lockdowns because we couldn’t spend them.

The best estimates put this at around £200 billion, huge. It is unevenly distributed, to be sure, with older, wealthier people having much more than the young, and some of the cash will be spent and spent. But in the meantime, you have to put it to work.

Other rules include only borrowing to acquire real assets, including the purchase of a house, rather than to finance current spending. They include, the point made by the Center for Policy Studies, investing in stocks for the long term.

Obviously, everyone should take advantage of tax incentives for savings and pensions, etc.

It may sound boring to call for common sense in managing personal finances, but this past bumpy week makes that message more important than ever.