Interest rates: the race to the bottom is on

Investors around the world seek the highest return with the lowest possible risk. Opportunities exist everywhere, as some markets outperform others, depending on various economic, geopolitical and other fundamental factors. Throughout history, one thing has remained constant as a driver of risk, specifically, the reason investors shift their portfolio allocation from one asset to another. That is the interest rate level.

A study that has compiled interest rates over the last 5020 years (short and long term rates) reveals that after 2005, short and long term rates were close to zero. This is higher than the levels observed during the 1929 Depression. When only short-term rates declined, long-term rates remained between 3 and 5%.  Long-term investors were finally rewarded and had a reason to be patient.

How about 2020?

2020: Global policy rate at or below zero

After the global financial crisis of 2009, interest rates rose slightly. While Europe and the Japanese were mostly in negative territory (especially after Dragi took over Europe's central banking operations), other parts of the world offered high yields to investors (like the U.S. and Australia).

The above chart reveals that the global policy rate last month is well below the lowest levels of the recent post-global financial crisis. So where will investors turn in their search for higher yields?

One obvious answer is the stock market. A recent survey of fund managers reveals that institutional investors are skeptical about economic recovery. Moreover, bull/bear sentiment is turning into a bearish bias, as only a few believe that the market is heading to the upside.

And yet, the Nasdaq is positive for the year, while the S&P 500 and the DJIA continue their recovery to the surprise of many. In addition, all of the managers surveyed agreed that a recovery is to be expected - a V-shaped recovery, a bull market, a bear market, a U-shaped or W-shaped recovery. In other words, one way or another (reminds me of that great Blondie song!), a recovery will eventually occur.