The Cost Of Business Just Went Up
/The cost of business just went up. Literally.
Long-term interest rates reached a level not seen in over 4 years this past week. The 10-year U.S. Treasury bond yield hit 3.00% for the first time since Dec. 2013. Take a look:
(chart created in stockcharts.com)
As you can see it has been a long time coming, but something that has seemed inevitable since the start of this year when rates really started to trend higher. You can also see how low rates remain compared to 10 and 20 years ago (or 30 years ago when the 10-year yield exceeded 10%!).
What this means is that the costs to finance have gone up. Mortgages, car loans, student loans, lines-of-credit, etc. are all getting more expensive. This is a big reason why I recommended refinancing debt in 2016 and 2017 because this day would eventually come. Higher rates are not a bad thing -- actually the opposite. But it does mean we are now seeing real inflation take hold.
For years we have heard that inflation is a problem and that interest rates were about to skyrocket. Those have been utter myths. But today they are more of a reality. It is natural for inflation and rates to rise as the economy expands. The key is containing both so that they rise at a steady, sustainable pace. If they rise too quickly that is when we see shocks to various markets, as we did with housing in 2008.
Home prices rise: Speaking of real estate, home prices forged higher in February, rising by an average +0.4% nationwide during the month and +6.5% over the past year. Seattle impressively continues to lead all major cities, up +12.7% annually. Seattle homes also rose the most in February, up +1.7%. Six other cities saw home prices rise by more than +1.0% as well in February alone, including Denver, Detroit, Las Vegas, Los Angeles, San Diego and San Francisco. On a yearly basis, Seattle leads Las Vegas (up +11.6%) and San Francisco (+10.1%).
Here is a complete city-by-city look at the S&P/Case-Shiller housing report:
In The Market...
The S&P 500 was essentially unchanged this past week. Let's look under the hood:
(price data via stockcharts.com)
This past week was pretty dormant considering the biggest companies – Amazon, Google, Facebook, Microsoft – all reported first-quarter earnings results. In fact this time a quarter ago stocks began what resulted in a -10% market decline. The S&P index continues to float between the January record high and the February low.
It was a defensive week, with dividend-paying sectors leading the way (Utilities, REITs) while the more economically sensitive sectors (Materials, Industrials) were the worst performers. Long-term Treasury Bonds gained as well, despite the 10-year Treasury yield hitting 3.0%.
This type of activity is what I would expect to see amid stock market volatility. The overall market outlook did not change much from the previous week. I remain cautious, particularly as we get closer to the summer months, which tend to be bumpy for stocks. We are days from May, which carries the moniker “Sell in May and Go Away” for the tendency by investors to sell stocks and wait until the Fall to start buying again. There is some precedent for this looking back over the years, however last year bucked that trend as the market plowed higher throughout the summer.
We sold our Financials sector position (XLF) across all accounts that owned it. I do not like the movement within Financials over the past two months, which has been relatively weaker compared to some other sectors. To that end I believe there are better sectors to own, namely Energy, which we are looking to buy but will be thoughtful in doing so. We are content sitting on a cash position right now given how choppy the overall market has been. We will be patient and reinvest those funds in the future.
In Our Portfolios...
In Financial Planning...
As Summer nears and the housing market heats up, I know a lot of people who are revisiting the same conversation from a year ago:
Do we sell our house and buy something new, or, do we remodel?
Many of these people are in a better financial situation than they were a year ago, so in a vacuum it may be enticing to buy a more expensive home or to pump money into their current one.
But should it be?
Consider some key differences from a year ago. Unless you are downsizing the next home is only going to be more expensive, so any additional equity you have built up over the past year will be necessary toward the new home. Second, as mentioned, interest rates are higher today. So if you end up with a mortgage balance that is bigger than what you currently have, not only will your monthly payment be bigger but your interest payments will increase. Finally, if you go the remodel route, be aware that contractors are likely more expensive and less available than in recent years. Also, unless you are paying for the remodel with cash, your line-of-credit will come with the same aforementioned financing costs.
It is important to know how the different markets have evolved, especially at a time when housing values are slowly leveling off and financing costs are really starting to rise.
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As a reminder, I will be out of the office on vacation Monday through Wednesday next week. If you need me I will be available remotely, but may not be quick to respond.
Have a great weekend!
Brian E. Betz, CFP
Principal®