Rates and The Correction
Several weeks ago, we spoke about the negative effects of economic growth. The two factors we cited were higher interest rates and higher oil prices. Now we are starting to see the markets react to this new reality. Many are blaming rising interest rates for causing what we can now call a stock market correction. A correction which we have not seen for some time. Why would higher rates cause stocks to falter? Abnormally low rates have propped up the markets for years. Why keep your money in the bank earning 1.0% interest when you can earn 10% or more in the stock market? That is an over-simplification, but certainly higher rates are taking some of this extra stimulus out of the equation.
Not that rising rates are the only explanation with regard to the trepidation in stocks. As we also explained several weeks ago, the tax plan was great news for stocks because it immediately made companies more profitable by lowering their tax rates significantly. Stocks have been rallying for nine years, comprising the second longest bull market in history, but the rally intensified in anticipation of the tax plan. We surmised that all the good tax news was already built into stocks, but the rally continued anyway — until rates started rising.
The question now is whether this is just a healthy and long-overdue correction which may reverse quickly, or is it the beginning of the end for the bull run? As always, we will stay away from predictions. Rates could ease back down or stabilize — and the market could climb back. Right now, the economy is healthy and rates have not risen far enough to cause the economy to pause. Actually, if the growth eased a bit, this could cause the Federal Reserve Board to be less concerned with inflationary pressures and perhaps permit them to take their foot off the pedal. For now, we have a pretty wild ride going on.
The Weekly Market Update
Rates on home loans rose again in the past week. For the week ending February 15, Freddie Mac announced that 30-year fixed rates increased to 4.38% from 4.32% the week before. The average for 15-year loans rose to 3.84% and the average for five-year adjustables climbed to 3.63%. A year ago, 30-year fixed rates averaged 4.15%, higher than today’s level.
Attributed to Len Kiefer, Deputy Chief Economist, Freddie Mac — “Wednesday’s Consumer Price Index report showed higher-than-expected inflation; headline consumer price inflation was 2.1 percent year-over-year in January — two tenths of a percentage point higher than the consensus forecast. Inflation measures were broad-based, cementing expectations that the Federal Reserve will go forward with monetary tightening later this year. Following this news, the 10-year Treasury reached its highest level since January 2014, climbing above 2.90 percent. Rates on home loans have also surged. After jumping 10 basis points last week, 30-year fixed-rates rose 6 basis points to 4.38 percent, its highest level since April 2014.”
Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.