Interest Rates, Interest Rates, Interest Rates
Based upon really good economic news, interest rates have just taken a big jump. The stock market has paused and is trying to figure out if this is bad or good. On the one hand, higher rates are headwinds for housing, cars, appliances, home furnishings and many other big-ticket items that are often bought on credit. On the other hand, higher rates merely reflect excellent business conditions.
This argument revolves around one key factor; how high is too high. All investors realize interest rates have been historically low for a very long time. Although rates have climbed somewhat, they are still below what most policy makers would consider appropriate for such a dynamic economy. Have we just gotten lulled into relying on cheap money?
Higher rates are someone’s cost, but another’s income. Savers have been subsidizing borrowers for too long. Savers have not received a return over inflation during this low interest rate period; they still aren’t, but it is getting better. Savers spend money too; more interest income may lead to more spending from them.
So, for the stock market, as long as rates do not cut-off economic activity, they are not a problem. We are watching closely but feel that rates can go higher, and businesses can continue to grow and do well. There may be periods of adjustment, mostly psychological, but then activity will continue.
Scott C. Wohlers