Hello, my name is Remy Jacobson. I am Vice President of Jacobson Wealth Management. Welcome to “Markets, In a Nutshell.” A commentary of August's economy, markets, and current events.
Let's dive right into a concise breakdown of recent economic developments:
The Government’s Cost to Borrow
You may not be a finance geek, but the cost that the US Government pays to borrow money affects us all. This cost is known as the interest rates on government issued debt (treasury bonds). Recently, the 10-year treasury bond reached the interest rate of 4.33%, the highest since 2007. Why does this matter? Well, higher rates mean investors are demanding higher pay for lending money to the US government. Why the fuss? A few added risks:
- Fiscal Health: The government's budget deficit is growing…and more than expected, so they need to borrow more. In order to entice lenders, they need to offer higher interest rates.
- Foreign Buyers: Due to a number of concerns such as weakening fiscal health, the rising cost of the US Dollar, and growing geopolitical tensions, foreign nations have decreased their purchases of treasury bonds. As foreign countries reduce their lending to the US Government, interest rates go up.
- Inflation Concerns: Investors are concerned about inflation being more systemic than a temporary fad. The reason being long-term trends like deglobalization, supply shortages of oil and gas, and strong consumer demand.
- The Result: Higher treasury rates = higher interest rates throughout our economy. This means that mortgage rates, credit card interest rates, and any type other form of loan are susceptible to having higher interest rates in the future. This slows economic activity and typically has a negative affect on the stock market.
Good Economic News = Bad Market News
August was a bit of a wild ride for the stock market. Worries about strong employment data and GDP growth made investors nervous… yes, you read that correctly. In this case, stronger economic data is worrisome in that it may encourage the Federal Reserve to raise interest rates even further, on an already strained economy. As mentioned previously, higher interest rates mean that money is more expensive; something the stock market is not a fan of.
But here's the twist: in the past 2 weeks, there has been a slight decline in Treasury rates and the less-than-stellar jobs report from payroll provider, ADP, have the markets feeling relieved. The hope is that these recent changes to the economic data might keep the Federal Reserve from raising interest rates.
The Federal Reserve Chimes in
Jerome Powell, Chairman of the Board at the Federal Reserve, briefed the public on the Federal Reserve’s thinking, during his speech at Jackson Hole. In essence, he said, "Inflation has eased a bit, but it's still high. We're ready to raise rates further if necessary," which left markets feeling skittish.
No need to panic just yet. We believe the Federal Reserve won't touch rates unless there is an additional surge of inflation in goods or wages. As of today, this has not been the case.
What do higher rates mean for you?
Higher interest rates may lead to higher mortgage rates, higher interest on credit cards, and higher interest on pretty much every type of debt. If you have a fixed rate loan outstanding, this does not affect you directly; however, it will affect new borrowers. Plus, it can slow economic growth and lead to a drop in the stock market. Not exactly welcome news.
How can you prepare?
A few words of wisdom on how to prepare for a higher interest rate environment:
- Review your current situation to see what debts are susceptible to higher interest rates.
- Build a financial plan to pay down any outstanding debt.
- Maintain an emergency fund with 3-6 months of expenses sitting in a savings account.
- Ensure you have a diversified investment portfolio.
- Discuss with a professional that can walk you through steps 1 through 4.
Statements of future expectations are based on current market conditions, and involve uncertainties that could cause actual results to substantially differ from those expressed. This commentary is for informational purposes only and should not be construed as specific advice.
Remy Jacobson is Vice President of Jacobson Wealth Management and an Investment Advisor Representative Offering Securities and Advisory Services through United Planners Financial Services, Member: FINRA, SIPC. JWM and United Planners are independent companies.