After another bad day in the US, stocks are set for a negative session in our market today, but buyers are on a buying spree as August retail figures are very hot. Rising interest rates, which are killing stock prices, don’t seem to be hurting retail sales.
Let’s take a look at the reasons investors’ returns are shocking right now, and they all have to do with rising interest rates.
In the stock market, the S&P/ASX 200 is down 8.18% and only down 4.92% over the past month. I know someone who has a 3 year average return of 5% on a well balanced investment in stocks and bonds, but until this year it was 8.6% per year!
He can blame it on rising interest rates. Those gains also sent the US S&P 500 down 13.78% for the year and 16% over the past six months as rate hikes took hold.
These rate hikes wrecked the bond market. Reuters wrote a story titled: “Bonds face worst year in decades.”
It showed that at the time of writing, the really safe US Treasuries were down 11% and set for the worst year since at least 1973! The same story of poor returns applied to Eurozone government corporate bonds.
Two major avenues for good financial returns (such as stocks and bonds) have experienced a shock in 2022.
Why does this happen?
To save the world from the Great Depression, which could have cut your insurance rates in half or wiped them out, central banks raised cash rates to 0.1% here and even negative in other countries. Now that the global economy is recovering, central banks are raising interest rates to stem the inflation caused by the global economic bailout. Also, there is inflation because Covid has locked down China, which has pushed up costs and inflation.
So is Putin’s war, which has driven up oil prices and inflation.
So now interest rates have gone up to stop inflation, but that has hurt stocks and bonds, so yields are terrible.
But that’s the price we’re all paying for the crazy few years since we first heard about the coronavirus.
With all this bad market news and rising interest rates, why did retail spending rise in August?
The Mastercard Spending Pulse reading for August was up 25.1% compared to last August. And “rose 27.4% from pre-pandemic levels, with jewelry sales up 107% in August compared to last year, apparel jumping 83%, consumer electronics up 66.2% and homewares of furniture grew by 51.6%”.
In an Australian This was reported by Eli Greenblatt.
Housing costs were up 131.5% but were about 5% lower than they were three years ago before we talked about something called Covid!
So why are we spending so much, even with interest rates rising and stock markets falling, and now housing prices falling? Try these:
1. A third of households do not have a mortgage.
2. A third of families rent housing, but not all of these people have received a rent increase, although it will soon.
3. These large numbers can be compared to two Augusts when many Australians were in quarantine. Sure, many people have shopped online, but others would never buy jewelry or home furnishings without seeing it.
4. Interest rates are rising, but it takes a few months for people to feel the sting of a 2.25% rate hike, and many people are still on fixed-rate home loans.
We will see the full impact of these rate hikes in 2023, but we have to hope that the RBA’s Dr. Phil Lowe and the US central bank’s Jerome Powell don’t go too far, too fast, and send us into recession. This is a big reason why stocks have fallen over the past few weeks. “The Fed has paved the way for much of the world to continue aggressive rate hikes, and that will lead to a global recession, and how severe it will be will be determined by how long it takes for inflation to come down,” Ed Moya said. , Oanda’s senior market analyst.
This guy could be wrong about Australia and the US, while the UK is probably already in recession. And the EU has a war in Ukraine that threatens a recession, but the fact is that the big players in the stock market now think that a recession is a chance, so they are dumping stocks.
When inflation starts to fall in the US in October and November, fears of a rate hike may fade and stocks will rise, but this is a game based on hope.
I don’t like to base my investment strategy on hope, but as a long-term investor, the hope that markets will eventually rally after a big sell-off is supported by history. You just need to be patient.