After another bad day in the US for equities, our market is expected to have a negative session today, but buyers are shopping mad with very hot August retail sales numbers. It seems that interest rate hikes that kill stock prices don’t hurt retail sales.
Let’s review the reasons why investor returns are currently shocking and they are all linked to rising interest rates.
For the stock market and the S&P/ASX 200 Index is down 8.18% and 4.92% alone over the past month. I know someone who has an average return over 3 years of 5% on his investments well balanced between equities and bonds but it was 8.6% per year before this year!
He can blame interest rate hikes for that. The hikes also sent the US S&P 500 index down 13.78% in one year and 16% in the past six months as rate hikes got serious.
These rate hikes knocked out the bond market. Reuters wrote a story titled: “Online bonds for worst year in decades.”
It showed that at the time of this writing, really safe US Treasuries were down 11% and poised for the worst year since at least 1973! The same story of poor performance applied to government enterprise bonds in the Eurozone.
The two main ways people get good financial returns (i.e. stocks and bonds) had a one-year shock in 2022.
Why does this happen?
To save the world from a Great Depression that could have cut your super in half or exploded it, central banks took cash rates to 0.1% here, and even negative in other countries. Now that global economies are recovering, central banks are raising interest rates to kill the inflation created by saving the global economy. Also, there is inflation because Covid has locked down China, which has driven up costs and inflation.
The same goes for Putin’s war, which drove up oil prices and inflation.
So now interest rates have gone up to kill inflation, but that hurt stocks and bonds, which is why the yields are terrible.
But that’s the price we all pay because of a crazy few years since we first heard about the Coronavirus.
With all this bad market news and rising interest rates, how come retail spending jumped in August?
August reading of the Mastercard Spending Pulse increased 25.1% from August of last year. And “rose 27.4% from pre-pandemic levels, with jewelry sales up 107% in August compared to a year ago, clothing up 83%, products consumer electronics up 66.2% and home furnishings up 51.6%,”
the australian Eli Greenblat reported.
Accommodation spend was up 131.5%, but was around 5% lower than three years ago, before we were talking about something called Covid!
So how come we spend so much, even with rising interest rates and falling stock markets and now falling house prices? Try these:
1. A third of households have no mortgage.
2. A third of households are tenants, but not all of these people have benefited from rent increases, although they will soon.
3. These big numbers compare to two months in August when many Australians were on lockdown. Sure, a lot of people have shopped online, but others would never buy jewelry or home furnishings without seeing it.
4. Interest rates have gone up, but it’s taking a few months for people to start feeling the pinch of the 2.25% rate hike, and a lot of people still have fixed-rate home loans.
In 2023 we will see the full impact of these rate hikes, but we have to hope that the RBA’s Dr. Phil Lowe and the US central bank’s Jerome Powell won’t go too far too fast and put us into recession. This is one of the main reasons stocks have fallen over the past few weeks. “The Fed has paved the way for much of the world to continue with aggressive rate hikes, and that will lead to a global recession, and its severity will be determined by how long it takes inflation to come down.” , said Ed Moya. , senior market analyst at Oanda.
This guy may be wrong when it comes to Australia and the US, while the UK is probably already in a recession. And the EU has war in Ukraine threatening recession, but the fact is that the big players in the stock market now think a recession is a chance, so they’re dumping stocks.
If inflation starts falling in the US in October and November, fears of a rate hike could be put to rest and stocks will soar, but it’s a game of hope.
I don’t like basing my investing strategy on hope, but as a long-term investor, hoping that markets will eventually explode after a big sell-off is backed by history. You just have to be patient.