It’s a mess
Some level of normalcy has finally returned in my life, and I’m so happy to finally be back in your inboxes. A lot has happened since the last time I wrote to you so this week is a bit more of a catch-all of the important developments that have created complete chaos in the markets in the last month. At the top of the list, without a close second, is the Federal Reserve. They have turned the financial markets completely upside down by doing the most aggressive 180 turn in monetary policy literally ever. Actually, this has been the most aggressive monetary tightening cycle ever. They let inflation run rampant, and then to try and put the genie back in the bottle, they’re sucking all the air out of the economy. Despite taking money out of the system and raising interest rates super aggressively, somehow our labor market is still humming along pretty ok and inflation has managed to keep climbing.
Moral of the story: The Fed is expected to continue tightening monetary conditions until inflation stops rising for several months in a row. Until the Fed changes its stance on policy, markets don’t have a chance of actually truly recovering. Stocks are being beaten down for several reasons – the continued Fed policy is expected to run the economy into the ground, so growth rates are just falling off a cliff (aka companies are expected to earn less money in the future), higher interest rates mean higher costs for companies (aka companies are expected to earn less money in the future), and higher interest rates means lower present values of future cash flows. So, companies are expected to earn less in the future and those future earnings are worth less today. Investor sentiment is bad and the flurry of bad news is only continuing, and stocks are reflecting just that.
You can’t buy that house
An intended consequence of the Fed’s policy shift has been the screeching halt we’ve seen in the housing market. Remember how totally nuts the housing market had become during COVID? Everyone knew of at least one person who had to pay way above asking price, forego inspections, and buy homes sight unseen during the last two years. Between rising wages, stimulus checks, and low mortgage rates, buying a home had become relatively affordable for a lot of people. Because of how fast and hard the Fed raised interest rates, mortgage rates on 30-year mortgages are sitting somewhere between 7.25% – 7.50%, and it’s not really coming with home prices coming down. Unsurprisingly, demand for new mortgages has plummeted, and is currently sitting at a 25-year low as buying a home has become entirely unaffordable.
Moral of the story: For most Americans, their home is their largest investment, and the opportunity for that investment really got yanked away from first-time home buyers. Let’s talk real numbers – if you were looking at buying a home (median sales prices for a house is $440k right now) with 20% down, you’re looking at a $352k loan. At the beginning of the year with mortgage rates at 3.35%, your monthly payment would’ve been $1,551. With mortgages now closer to 7.35%, your monthly payment is $2,425. That’s 56% higher. IN TEN MONTHS. Of course nobody is buying a house these days.
Elsewhere in the world, it’s also a mess
Things aren’t great elsewhere either – Europe is in complete disrepair as the region continues to deal with the Russia/Ukraine conflict, which is keeping food and energy prices really high. If inflation is bad here, it’s worse in Europe. Prices are 10.1% higher in the UK and it really hasn’t even gotten cold yet – once the winter is here, the energy crisis in Europe is going to be a massive issue. Consumers are already having to cut corners on their spending to make it through, and the typically strong shopping season around the holidays is expected to be pretty bleak this year. All of this chaos was made worse by policies from the UK government, which led to their Prime Minister resigning on Thursday after only 44 days in office.
Moral of the story: If we’re waiting for the economy to be run into the ground in the US, it’s already there in Europe. The outlook feels pretty depressing with a worse job market, higher interest rates, and consumers likely to pull back spending in a big way as incomes get squeezed paying for energy into the winter months. If markets feel bad here, trust me it feels much worse across the pond.