For months, maybe years pundits have been pounding the table telling us about the doom and gloom that is sure to come when the fed raises the fed funds rate. News reports informed us that the stock market is artificially high and that this high is based on low interest rates. The theory was that if rates go up then the market will have to correct itself. This fear has kept people on the sidelines and out of the money game.
The initial problem with this line of thinking is that the stock market is not directly tied to interest rates! The bond market is but not equities. I’ve learned that a lot of the time when somebody says something that does not make sense it is because it does not make sense. Meaning that there is no truth to what they are saying. The interest rate is inflating the market argument just doesn’t make sense.
A part of this club is educational not just $$. This brief article should help you learn how WE can take advantage of falling rates.
First, I expect the prices on real estate to come down. This is great for those of us on the Todd Acquisitions side because for some time the market has been saturated by sellers who only want cash offers and sellers who were trying to recoup their 2007 valuations. Most of those values are unjustified, unprofitable and unworkable. We are in the game to find deals not to overpay for headaches. You make the money on the buy but most of these sellers are so stubborn that there is no money to be made. These insane prices have priced a lot of would be investors and home buyers out of the market.
Additionally, all cash just isn’t a good real estate play. The true value is leverage. As rates increase buyers wont be able to afford the price of the homes and thus the market will drive prices down to compensate. Additionally, lenders will now be more inclined to fund our deals.
With higher rates, I expect for lenders to become more lenient. Lenders can now provide home loans at higher rates which increases their revenue. For the longest time people were excited to borrow because they could get low rates. But the bank wasn’t exactly excited about locking in a thirty year fixed loan at historically low levels. Its like taking a permanent pay cut. Higher rates will allow the borrower to take on a loan for a lower priced property for effectively the same price because the low price and higher rate will balance things out in the consumer favor (fingers crossed). The difference is that the bank will actually want to make the loan now.
Bank stocks and financials have been lagging for some time. This is because .50-ish savings rates have kept people out of CDs and standard savings accounts. This impacts their ability to lend because they don’t have the necessary reserves. Their ability to lend impacts their revenue and impacts their stock price. This makes banks a great opportunity to buy going forward. Rates aren’t stopping here, they are bound to increase.
On the other hand, we could see more risk adverse investors pulling their money out of the market and back into more secure accounts which could move the market south. We will have to wait and see on this one but if it happens it could mean a buying opportunity.
I think that financials are the best play to capitalize on this move. I don’t really see interest rates having a huge impact with other stocks because other companies aren’t so heavily impacted by interest rates. Maybe credit card companies like Visa, American Express, Mastercard. However, it’s business as usual for the rest of the market.
Higher interest rates invite inflation as prices adjust to allow for margin. The good thing is that investing is a hedge against inflation because the stock market absorbs inflation. As prices increase on other items so does the stock market. I was reading Warren Buffet’s autobiography and in the 60s there was all this rage about Dow 1000. In a month or so we will see Dow 20,000… the market tends to go up over time. The only people not making money are those that aren’t in the game.
The key is to trust the power of capitalism. There are too many people that have an interest in seeing the economy succeed that cant afford to see it fall. There are people with pools of money out there and just have to find somewhere to park it. These people aren’t selling stocks so they can get cash to pay the mortgage because their wealth is sustainable whether they have access to it or not. They aren’t investing their life savings. To win the game of investing you have to learn to think like the wealthy. When something goes down there is something going up somewhere else. Like Cramer says “there is always a bull market somewhere”. It’s our job to find it.
If you want to get off the sidelines and into the big leagues email firstname.lastname@example.org to join our club!!!