So the Fed finally rose the Fed Funds Rate for the first time in 3 years from 0% to 0.25%. (Read this to understand: What the Fed Funds Rate is and Why it is important.) The Fed also announced that there will be the possibility for at least 6 more rate hikes for the rest of this year bringing rates to about 1.9%. However, they will proceed with caution as they continue watching the effects of the Invasion of Ukraine by Putin (more on this below).
The immediate effect of this was the rise in the average interest rate for mortgages. Which rose above 4% for the first time in over 3 years. This is a bigger deal than appears on paper (read on to see why).
How did the stock market react to all this supposed negative news?
It rallied all week.
This was the best week in the Stock Marker since November 2020. Some people say the rate hike had been baked into expectations for so long that it was more of a relief for investors to know what they will be working with.
Look at all that Saint Paddy's Green:
Tale of the Tape
ECONOMY
The Fed is trying to walk a very tightrope of fighting inflation without causing a recession. The latest rate hike is the Fed’s play at challenging inflation to a duel.
The problem is right now inflation showed up to the fight with a Halo Energy Sword (pun-intended because these gas prices are insanely high) while the Fed is showing up with a dagger.
But before we count the Fed out, they have the strength of the Labor Market (11 million job openings) on their side. Plus consumer demand seems insatiable as people rush out of the pandemic (Retail Sales are up 0.3% from January to February. Seems small until you remember these numbers represent trillions of dollars).
BUT Pt. 2 (revenge of the BUT), History is not on the side of the Fed when it comes to fighting inflation. Usually, when the Fed begins raising interest rates to fight back inflation a recession follows. The recession is what ends up causing prices to reset because demand is basically sent to detention as borrowing costs get way too expensive. Speaking of borrowing, let’s talk housing. (If you want a full breakdown of how we got here, read this Axios article)
Housing
With the Fed increasing interest rates, we saw Mortage Interest rates go above 4% for the first time in over 3 years. Meaning housing is going to be a lot more expensive.
According to Freddie Mac’s Primary Mortgage Market Survey,
Freddie Mac is important because they basically buy everyone's mortgage loan. So they have a ton of insight
They are technically owned by the government meaning your loan is backed by the faith and strength of the US government.
Great for incentivizing banks and financial organizations to continue making loans post 2008, but puts strict limits on the loans banks can make because the GREED of man is a thing.
found the average rate for a 30-year, fixed-rate mortgage was 4.16% for the week ending March 17. That's up from 3.85% the week before, and the first time it's been above 4% since May 2019. And all those are up from the 3.09% we had just in March of 2021 (Bruh, wish I bought last year 😫😩).
A 1% interest rate is a BIG DEAL because it can be the difference between being able to afford a $350,000 house in the right neighborhood that has the extra space a family needs. Or staying in a cramped house/apartment and having to turn your closet into an office. Which your husband or wife (depending on who has more clothes) will not like.
To help Understand, here is a quick comparison of a $350,000 house. I will only change the Interest rate:
This can be the difference between someone being house poor or not.
According to The S&P CoreLogic Case-Shiller National Home Price Index, which measures home prices in major US metro areas, the average home price rose 18.8% in 2021. The highest price increase since the index was started in 1987.
Zillow followed up with numbers: Home Value increased by $52,667 to $321,634. Not great when the median annual salary of $50,000
For new homeowners struggling to purchase a home amid a low housing supply and record-high prices of single-family homes, higher mortgages could become tremendous stressors.
My Takeaway: This is exactly why I will forever SCREAM from mountain tops that
YOUR PRIMARY RESIDENCE IS NOT AN INVESTMENT!
People don't buy homes because they've calculated a return they expect to make. We buy a home because it is a lifestyle move, a progression in growth not a calculated investment decision. Remember when no millennial was ever gonna buy a house? Now all millennials are buying because it is all about timing, most millennials are entering that point of life where we now have families, we need more space. It is no longer about hanging out with friends on the weekend. We now have little Billy’s soccer game and little Suzie’s basketball game. A primary residence is AN EXPENSE that we choose to take on.
In your personal life, pay close attention to any debt that you may have. If you have any variable interest rate loan, you might want to focus on paying it off faster than you thought. Because rates will fly faster than you expect. It can really eat into your budget if you don't have rates locked in.
Higher Rate Effect on STOCKS
If you are a stock picker, you probably want to pay attention to if a business needs debt to run its operations. If it needs debt, it means it'll be more expensive for the business to operate which means less cash flow. Especially if that business cannot pass on costs to its customers. These businesses will have their valuations compressed substantially moving forward.
On the other hand, this works out perfectly for certain businesses like Banks. They make more money as rates increase because their main source of income is lending money. I am not telling you to start buying bank stocks. It's just an observation of what you should watch out for.
If you are not a stock picker, ignore everything I just said.
Random Non-Money Stories
**So this will be a new segment I add from time to time. These are articles I found interesting during the week that has nothing to do with finances but I wanna share.**
Moderna wants to stick you for the 4th time. They just applied to the FDA for authorization on the second dose of a Covid-19 booster shot. My reaction:
NASA has a new Rocket Ship. The Artemis I Lunar Rocket, is said to be the next generation of rocket ships that will take us back to the moon. The Ship was moved into place on Thursday to begin final testing before its unmanned test launch sometime in May (more likely June cause nothing is on time with NASA). Took an entire day for the ship to move about 4 miles from hanger to launch site. Then again it is 300ft tall.
NASA says Artemi missions will land the first woman and persons of color on the moon. GO check out all the pics here
Looking Ahead
EARNINGS
Nike, one of the best brands in the world reports earnings this week. I went to a basketball game over the weekend (GO HAWKS!) and I looked at the shoes people were wearing (I like to see what people are into for investment purposes). It felt like 7 out of 10 shoes were either Nike or Converse (owned by Nike). Yes, this is very much anecdotal evidence but it is very interesting how dominant Nike has been.
Adobe also reports this week. The rest:
Totally Unnecessary Man U Update
Well, we crashed out of the Champions League last week. Losing at home to Athletico Madrid.
At least I saw a great game from Atlanta United this weekend. Came back from 3-1 down to tie the game in the final 10 mins.
Thank you for reading
I hope you all have A WONDERFUL WEEK. I may see you back here maybe on Wednesday for another post, busy week ahead. In the meantime, Go subscribe to Rambling Mind Podcast for mid-week stock market updates. You can also catch me on TikTok, Instagram, and YouTube every day.
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God bless Each and Everyone of y’all
✌🏾