Before you open your wallet this weekend, you’ll want to read this: Money just got more expensive. Interest rates are higher than they’ve been in years. So is the Dollar. The Euro currency is down to $1.04, the lowest in over a decade. Interest rates and the Dollar both have a significant impact in our daily lives. The Fed raised the overnight rate for the first time this year and just the second time since the Financial crisis. Rates are no longer at zero. They’re finally moving higher, and in our minds, for the right reason.
Rising rates have also helped send the Dollar higher, particularly against the Euro currency. The strong Dollar enhances buying power overseas. It’s good for travelers. To put the Dollar/Euro move in perspective, imagine you went to Europe in the Spring of 2014. Let’s say you paid 300 Euros a night for a hotel in Italy. A dinner at a restaurant might have cost 60 Euros. The bottle of wine cost 30 Euros. Two and a half years ago, that 390 Euro bill would have cost $512. Today it costs $405, a savings of $107. Apply that to your 2-week trip and you are talking about a $1500 savings. That is a huge difference! That trip to Lucca is looking pretty attractive.
The flip side to the Dollar strength; it’s bad for American companies that export around the globe. So far it’s not derailing the rally, but it will have impact. Stocks are hitting new, all-time highs because growth has returned. Economic activity has been accelerating. Corporate America is lean and the American Consumer is spending again. Earnings and revenues are showing signs of growing again. The price of oil is around $50, a nice balance for producers and consumers; Not too high, not too low. Bonds have been hit hard with the rising rates. We have kept our bond maturities very short-term. The back-up in rates has actually made Bonds interesting again for potential purchase. We see rates going higher still, but the speed of the climb should slow.
Interest rates are the price of money. It’s the price you have to pay to get a loan. It is getting more expensive to borrow. You certainly see it in housing. 30-Year jumbo mortgage rates have jumped over 1% since the Summer, to around 4.5% today. It’s still really low, but going higher. Home Equity Lines of Credit are usually floating rates, and just went higher. That’s why it pays to lock-in at low rates. Monthly payments matter. You just buy less house and more interest. It all adds up. Interest rates influence many large purchase items that require financing, such as appliances and cars. Many of those 0% financing deals are in the rearview mirror. How about this: the average interest rate on credit cards today is a whopping 16.5%. That’s the average! It was 15% a month ago. There are some cards that charge as much as 20%. Credit card debt can completely bury people, which is why it’s so critical to pay those balances off every month. Please remind your friends and family over the holidays.
For you Quantitative stat fans, you may be wondering: At what point does the rise in interest rates HURT the Stock Market?
We have been running historical correlations between the pace in which interest rates just rose and the possible effect on the Stock Market. We found no statistical negative correlation between the two. Also of note, is the fact that default risk in the Bond Market has decreased substantially during this move up in interest rates. The credit markets are very healthy. This is a critical issue and it’s positive. The Fed raised rates this week because the US economy no longer needs aggressive support. It’s moving on its own, and showing signs of strength not seen in years. While Fed rate hikes can sound like bad news, they’re a vote of confidence in the economy. It is setting up for a very promising 2017.
Enjoy the weekend. The holiday spirit is here. We’ll be back, dark and early on Monday.