What Rising Interest Rates Really Mean
The rise in Treasury yields has accelerated, and the Fed is using essentially every opportunity to tell the public that interest rates are going to rise even more in the coming months.
So, as we all embark on this potentially steep rise in rates, I wanted to take a minute to see what effect rising rates have had on the “real economy,” because one of the biggest risks to the market right now is an economic slowdown — and understanding when rates reach a level where that might occur is very important.
But before we dig into the details here, I want to tell you that today’s issue is an excerpt from my daily market briefing publication, “Eagle Eye Opener.”
The “Eagle Eye Opener” is a collaboration between myself and my “secret market insider,” a man who delivers institutional research to some of the biggest names in the professional investing industry, but who also shares with me some of his insights — which I share with you each morning in the “Eagle Eye Opener.”
The following is our analysis on what rising interest rates really mean…
To see what effect rising interest rates have on the economy, we looked at rates of several important consumer loans: 30-year mortgages, 5/1 adjustable-rate mortgages (ARMs), 60-month auto loans, HELOCs (home equity lines of credit) and credit card debt.
And the conclusion for all these loans was clear: Rates aren’t yet at levels that we think will restrict growth (and in some cases they are still far from levels that would restrict growth).
With the exception of the 30-year mortgage (which arguably is the most important of these consumer loans), none of the other major consumer loans are meaningfully above levels seen in January 2021, when economic growth and inflation were both more subdued.
5/1 ARMs, HELOC rates, car loans and credit card rates are all essentially at the same place they were in January 2021, and in all these cases they are below levels in January 2020 (pre-pandemic), a time when consumer balance sheets weren’t as strong as they are right now.
Now, mortgage rates have risen, and they are above pre-pandemic levels. But they are still well below the January 2019 levels, and that’s notable because early to mid-2019 was the last time we saw a meaningful loss of economic momentum, which prompted the Fed to halt balance sheet reduction and rate hikes in mid-2019.
The bottom line here is while Treasury yields have risen, causing mortgage rates to accelerate, the majority of other important consumer loan rates have not risen substantially.
So, what does this mean for financial markets?
We and others have said consistently that Fed rate hikes eventually choke off economic growth, but how many hikes and how long it takes is a function of 1) How low rates are at the start and 2) How strong growth is when rates begin to rise.
Right now, rate “lift off” is starting very low and economic growth remains very strong, and this analysis of consumer loans reinforces this point: It’s going to take a while for the Fed to choke off the economic recovery, even if they raise rates 50 basis points at the next Federal Open Market Committee (FOMC) meeting in May.
Bottom line, interest rates are rising, and they will continue to become a stronger and stronger headwind on the economy and the markets. However, they aren’t near levels yet that would imply economic growth is stalling. That’s why, despite many risks facing markets, we’re sticking with equity allocations — because we could still have a year (or more) of economic expansion left (although that might be too optimistic, but we’ll be watching and, of course, let you know if something changes).
For now, the risk of stagflation (meaning high inflation and stagnant economic growth) remains a future problem, not an imminent one.
Once again, for more insights from my daily market briefing, Eagle Eye Opener, I invite you to check it out today.
ETF Talk: Analyzing a ‘Basic’ ETF
As global uncertainty continues to thrive due to supply disruptions caused by the COVID-19 pandemic and the war in Ukraine, while inflation boosts the price of many consumer staples, the continued importance of consumer goods to both investors and consumers has been underscored.
One exchange-traded fund (ETF) that is heavily involved in consumer staples stocks should be familiar to my Intelligence Report subscribers: Vanguard Consumer Staples ETF (NYSEARCA: VDC). This ETF tracks a market-cap weighted index of stocks belonging to American companies that are somehow involved with the Consumer Staples sector.
This fund’s managers focus on pure-play consumer staples exposure, meaning that the basket of stocks in this fund attempts to cover wide breath and representation. While the fund tracks an all-cap index, the stocks in it are selected and weighted by market capitalization. To avoid overrepresentation, the managers have followed regulations established by the U.S. Internal Revenue Code and established an investment limit no more than 25% of the value to a single issuer and more than 5%, not exceeding 50%, of total assets.
Currently, the fund’s top holdings include Procter & Gamble Co. (NYSE: PG), Coca-Cola Company (NYSE: KO), Costco Wholesale Corp. (NASDAQ: COST), PepsiCo, Inc. (NASDAQ: PEP), Walmart Inc. (NYSE: WMT), Philip Morris International Inc. (NYSE: PM), Mondelez International, Inc. (NASDAQ: MDLZ) and Altria Group Inc. (NYSE: MO).
As of March 22, VDC has dipped 0.27% over the past month and 0.26% for the past three months. It currently is down 2.93% year to date.
Chart courtesy of www.stockcharts.com
The fund has amassed $6.67 billion in assets under management and has an expense ratio of 0.10%.
In short, while VDC does provide an investor with a way to profit from consumer staples, this kind of ETF may not be appropriate for all portfolios. Thus, interested investors should always conduct their due diligence and decide whether the fund is suitable for their investing goals.
As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.
In case you missed it…
She’s My New Favorite Superhero
Scroll through a list of new film releases over the past several years and you’ll notice the titles are dominated by superheroes. Spider-Man, Black Panther, Wonder Woman, Batman, Iron Man, Superman, Aquaman… the list of lead characters with superpowers is somewhat exhausting. Now, I know I’m a bit old school, but I prefer literary heroes such as Howard Roark, John Galt, Cyrano de Bergerac, James Bond, Guy Montag and Atticus Finch.
Yet what is even better than fictional heroes are real-life heroes. Here, I consider as some of my favorites Ayn Rand, Aristotle, Sir Isaac Newton, Galileo, Ludwig von Mises, Charles Darwin, Carl Sagan, Jeff Bezos, Bob Dylan, Larry Ellison, H.L. Mencken, Thomas Jefferson, and many, many more.
Today, I am adding a new superhero to my personal pantheon, and her name is Marina Ovsyannikova.
I suspect you know who Marina Ovsyannikova is, although her name might not be at the front of your mind. I also suspect you’ve seen the video of her protesting her employer’s lies and propaganda regarding Russia’s war on Ukraine.
The photo here of Marina Ovsyannikova in all her heroic glory is no doubt already well known to the world.
The photo, taken by yours truly, is a screenshot of the March 14, Channel One broadcast (Channel One is the official state TV in Russia, or as I call it, the Putin propaganda network).
Earlier that day, Putin banned access to Instagram within the country, which is all part of his crackdown on the dissemination of information to some 80 million Instagram users about the Russian invasion of Ukraine.
Apparently, this was the final straw that led to Ovsyannikova’s brave act of protest, as the editor and producer at Channel One decided she had seen enough, and she devised a low-tech, yet eminently brave and effective form of protest — basically just “photo bombing” the live Channel One broadcast with a sign that translates to: “No war, stop the war, don’t believe the propaganda, they are lying to you here.” The bottom of the poster read in English: “Russians against war.”
As Ovsyannikova, and the world, expected would happen after her act of bravery, she was quickly detained by Moscow police soon after the incident, her fate and punishment at the time unknown.
According to Ovsyannikova, she was questioned for some 14 hours by Moscow police, was given no access to legal help and was deprived of sleep for some two days. She was then released after being found guilty of organizing an illegal protest and fined 30,000 rubles (about $280).
In her pre-recorded video before her act of protest, Ovsyannikova condemned the war on Ukraine and the shame she’s felt for being complicit in the propaganda from Channel One.
Here is the translation of what she said, “Unfortunately, I have been working at Channel One during recent years, working on Kremlin propaganda. And now I am very ashamed. I am ashamed that I’ve allowed the lies to be said on the TV screens. I am ashamed that I let the Russian people be zombified.”
Ovsyannikova went on to say the following powerful words directly to her countrymen, “We are Russian People; we are smart and thoughtful, it is only in our power to stop the madness.”
She concluded with the following heroic plea, “Take to the streets, do not be afraid. They can’t jail us all.”
If the rest of the world had a modicum of the courage, conviction, sense of responsibility and sense of right that this woman has, the world would be a far more beautiful place.
Marina Ovsyannikova, you are my new favorite superhero.
When Silence is Lying
“When you have something to say, silence is a lie.”
–Jordan B. Peterson
Injustice and wrong thinking thrive when good, rational people fail to challenge them. So, if you have something to say about something important, just say it. Because if you remain silent, you help perpetuate untruth, and the last thing the world needs is more untruth.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,