As bond yields have risen, lets discuss how this impacts the stock market, what this means for real estate, and how you can use this information to make money – Enjoy! Add me on Instagram: GPStephan
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All of this starts with one spooky word: INFLATION. It’s generally thought that the more money gets printed into our economy, the more we devalue the existing circulation of currency, and the more it costs to buy the same thing.
BUT…over the last 40 years or so…something interesting has happened…the rate of inflation has CONSISTENTLY BEEN GOING DOWN since the early 1980’s…AND NOW, inflation has struggled to even reach 2%.
WELL…investors are worried that there WILL BE INFLATION…in fact, more inflation than usual, caused by TRILLIONS OF DOLLARS of new money poured into the economy, that hasn’t yet been spent – ONLY BECAUSE the economy has been shut down for the last year.
When investors don’t buy these bonds, the interest rate they pay has to go UP to an amount where people feel comfortable buying them.
When interest rates go up, corporate debt costs more to maintain, that eats away at profit margins, and stock prices begin going down. Valuations of GROWTH STOCKS, like Tech, Solar, and EV – are also incredibly sensitive to any increase in interest rates….that’s because those companies are valued on their FUTURE GROWTH POTENTIAL…and, when interest rates are so low…investors can afford to pay a higher price for those stocks, because they aren’t losing out on much money in terms of what a treasury would pay, instead.
BUT…When rates go up, Treasuries start looking a LOT better in comparison…and, when debt begins costing more to maintain…tech and growth stocks begin selling off, bringing down the entire market alongside with it.
SO NOW…the ultimate question…what’s going to happen, and how likely are interest rates to begin going up and dropping the market?
WELL…that really depends who you listen to.
On the one side, we have the head of the Federal Reserve, Jerome Powell.
He has gone on record – MULTIPLE TIMES – to say that he has no intention of raising short term interest rates, and he’ll keep them near their all time low of 0%. He also said that we should EXPECT to see an initial spike of inflation as people finally go and travel, eat out at restaurants, and otherwise “just get it out of their system” – but, long term, inflation won’t be a concern, and not to worry.
BUT…Investors don’t believe this, and think there IS going to be more inflation, much faster than The Federal Reserves thinks…and that’s going to force them to raise interest rates quicker than they’re telling us.
But whether or not that’s ACTUALLY the case is yet to be seen…since inflation data comes out monthly, it’s likely going to take us some time to see what really happens once the economy fully re-opens. My thinking is that, most likely – YES – we will see higher inflation – we WILL see higher interest rates – and that WILL have an impact on the value of the stock market and real estate.
HOWEVER…once the true inflation data gets more consistent throughout the rest of the year…I think everything will return back to normal, and continue along as usual. It’s only “scary” right now because it’s the unknown – we have no way of TRULY figuring out how much inflation will be, how high interest rates will go, and how much the stock market will drop.
The truth is, interest rates are STILL HISTORICALLY LOW…even if we return back to 3.5% mortgage rates…that’s something we would’ve DREAMED about just 2 years ago! I think we’ve gotten too accustomed to so much free money, that it distorted our view of what’s normal….and this isn’t it.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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