Last week, the Federal Reserve made the decision to raise rates by three quarters of a percent or 75 basis points which was said to be off the table at the last meeting. This is the largest increase in rates by the Fed since 1994. As you can see in a chart shown in the episode, a 75-basis point hike is quite rare. Looking back to the previous one hundred Fed hikes since 1979, it shows that this aggressive move is to fight stubbornly high inflation. With this aggressive action, we’re going to be watching the impact it might have on housing and the inflation numbers very closely over the next few weeks. We’re already seeing some housing numbers cool off. The bottom line is that the Fed has made it very clear that they are going to fight inflation. We’ll be watching the policy impact carefully in hopes that the Fed doesn’t make a mistake and put the economy into contraction. We need supply chains to improve, and we need more workers entering the workforce. Hopefully the Fed will avoid a policy mistake that could hurt the economy long term. Also, last week, the market had a negative response to Switzerland’s central break making a surprise move by hiking their interest rates by 50-basis points. This is news because this is the first rate hike for Switzerland in over 15 years. Central banks around the world are tightening policy while trying to fight inflation.
The silver lining of higher rates is that investors can now expect a return on their money for investments outside of stocks. For the last decade or so, we’ve been living with what’s called the TINA market. That stands for, there is no alternative. If you wanted a return on your money, you couldn’t go to fixed income or cash because the Federal Reserve and other central banks kept rates so low that if you want a return, you had to go into equities. A chart shown in this episode shows the percentage of S&P 500 companies that are yielding more than the 10-year treasury. For the last decade or so, the majority of stocks have yielded more so if you wanted any kind of return or income, you had to go to the stock market, not the bond market. Well, that’s dropped down to 11% thanks to the Fed and interest rates going up. You can now find an alternate, other than stocks, where you can get a return on your investment. Also, companies that pay dividends are being rewarded. Another chart in this episode shows the relative performance of stocks that pay a dividend vs stocks that do not from 2015 to now. You can see that during 2020 and 2021, interest rates dropped to zero in the US. You needed money from investors to get stocks to move higher and that’s flipped now. Companies are being rewarded for paying dividends and for paying out money to invest. We went from a TINA market where there is no alternative and you had to invest in equity to get any kind of return, to now where you can, thanks to the central bank movement, start to earn money on your money without taking on unnecessary risk.
A Decade in Review
While the US went all the way down to zero percent interest rates, a lot of countries actually went to negative rates. The dollar value of negative yielding debt in the world has declined by 90% just since December 2020. It reached a high of 18.4 trillion and now is at 1.7 trillion. The higher rates are a thing around the world and not just in the US. Interestingly, as you will see on the chart shown in this episode, the 10-year yield reached 3.5% for the first time since April of 2011. On the chart you will see some interesting comparisons from April 2011 and today. What stands out is that oil today is $118 a barrel and we are all feeling the pressure of gas prices at the pump. According to the chart, oil hasn’t made that big of a move since 2011 where it was $108 a barrel. In 2011, Bitcoin was $1 and right now it’s $22,212. Another interesting piece of this chart is the biggest stock in the world was Exxon in 2011, but now it’s Apple. As you can see, a lot of things have changed in the decade since the 10-year yield reached 3.5%.
We saw a lot of volatility in the markets last week. Wednesday was a unique trading day after the Fed came out with their decision on interest rates. We saw the markets go up, with nine out of the eleven sectors being up. One thing that we like to look at on a weekly basis is moving day averages for the S&P 500. Last week, we saw the 20-day moving day average fall under 4,000. This is one of those important short-term levels to look at. For the intermediate term, it’s going to be important to focus on the 50-day moving average. The intermediate support level is currently sitting at 3,630 with the intermediate resistance level at 3850. Coming back around full circle, the 50-day moving average is what we want to keep an eye on as we find our footing in the markets.
Bobby Norman, CFP®, AIF®, CEPA®
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Email Trey Booth here
Adam Vansant, AIF®, BFA™
Email Adam Vansant here
Associate Vice President
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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