The Federal Reserve has raised rates several times during the last year. The cost of borrowing money has gone up for both the private sector and for government. The average lending rate for a mortgage has shot up from 3.9% to around 5% in just one year.
Barron’s recently reported that large bank profits may increase 40% due to the Fed’s interest rate hikes.
Further, 40% of the holdings of companies like Berkshire Hathaway are said to be financial-related stocks. Therefore, many may benefit from this new stream of gains, or increased interest and dividends.
Additionally, a key expense of doing business is the cost of inventories not yet sold. Companies may need to pay interest on any of the inventory that is not selling. This affects primarily small business as big sellers such as Amazon and others do not hold the inventory.
In contrast, the FAANG stock losses and the tech FANG-over has begun. Big tech will still make plenty of money, but much of the tech industry’s budget will be consumed by paying interest on debt much like city, state and federal governments, the Street.com reported.
The main reason for normalizing interest rates is probably based on the Fed’s desire to shore up the financial sector’s sustainability.
Here Are Key Takeaways for the Month of November:
- With 44 million Americans having student loan debt, lenders are well positioned to make more money but there would be less disposable income for working families in 2019.
- There is also $9 trillion in corporate debt where everyone will be required to pay a higher rate of interest on borrowing or issuing bonds, CNBC reported.
- Oil costs shot downward from around $74 down to about $52 per barrel while gold and silver prices remain relatively low.
- President Donald Trump and Republicans won more seats in the US Senate but lost the House of Representatives. Thus, there may be two years of governmental gridlock, but the December House session may produce some bills to go to the Senate next year before Republicans are ousted from power.
- Goldman Sachs said it is selling some positions and going to cash for their clients.
- Some overseas markets are down for the year. China down 22% and Germany down 13%, Mexico down 15%, Korea down 16%. Thus, some international markets may be a good investment for 2019.
- When interest rates are raised, stock markets have gone down 80% of the time. The markets have gone down 5% or more in the 16 rate increase cycles since World War II.
In one of my previous articles, I stated that there must be a happy medium, or a middle way, to implementing Fed interest rates when the economy is doing well. After the biggest market crash in history in 2000, we have learned that cranking up Fed rates too high can blow up an economy.
Based on all of this analysis, if the Fed hikes rates again, then Goldman Sachs is 100% correct that smart investors or potential retirees should consider selling stocks and going to a larger position of cash as a big correction can come.
People Who Will Make More Money:
- Big banks (Bank of America, Wells Fargo).
- Credit card companies.
- Student loan providers.
- Broker dealers and margin loan lenders (SCH Schwab, Ameritrade).
- Insurance companies.
- Mortgage lenders.
- CD holders and those utilizing fixed income investments.
People Who Will Earn Less Money Due to Higher Interest Rates:
- Investors and retirees.
- Companies with high cost inventory like automakers, John Deere, etc.
- High tech start-ups that need capital.
- Adjustable loan holders.
- Those with credit card debt and student loans.
- Bond holders.
- Companies holding $9 trillion of corporate debt.
The objective of this summary is to illustrate the key issues of the month and help investors to see the big picture. Using these pieces of a financial puzzle, you may be able to better maneuver the investing world and better communicate with your advisers.
George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award winning author and advisory board member to several companies around the world in education, charities, and crypto currency.
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