Rising Interest Rates Will Lower Stock Prices
As many expected, the Federal Reserve raised the benchmark interest rate to a range of 0.5% – 0.7%. During Janet Yellen’s announcement, she said rising employment rates among other measures have led to “considerable progress” for the economy, adding she and her FOMC colleagues expected the economy to “continue to perform well.” In response to the rate increase, gold prices began a steady decline beginning around 1 p.m. GMT at $1,161.84/oz. and ending the day at $1,141.77/oz.
Since the Nov 8 election, gold has been down 10%, but is currently up 6% up for the year, which began Jan 1, 2016, at $1,063.22/oz. After last year’s quarter point hike, a similar move south, finding support in mid-Dec at $1061.98/oz. and rallying to $1,230.85/oz. in Feb 2016. In a way, we’re seeing a similar reaction by the market, but there are important differences that show investors are misreading the implications of rising interest rates and Trump’s fiscal stimulus plan.
Investor exuberance in stocks could be characterized as “irrational” given the drag interest rates are going to experience on any stimulated growth. Stock speculators are seeing opportunities from Trump’s proposed tax cuts and deregulation. Stocks are already over-priced and higher interest rates will tamp down consumer and business spending, decreasing their value further.
The hope is that tax cuts will offset the rise in borrowing costs, but the side effects of national debt expansion will be much more significant this time around. George W Bush’s 2001 Economic Growth and Tax Relief Reconciliation Act increased the debt by $1.35 trillion over a 10-year period, according to The Balance. The US simply has no room left to borrow more money.
The Fed’s monetary policy of providing easy money for so long will also have negative side effects for those with mortgages and auto loans. The mortgage slowdown in new applications is already underway. Higher interest rates mean higher monthly payments for homes and cars. The increase will also cut into the benefits of tax cuts. Lowered demand in housing will ripple throughout the economy and serve as resistance to stimulus. Low borrowing costs have been the new normal for a while now. Changing that with higher interest rates will prove a challenge as the US economy tries to taper off its addiction to free money.
Peter Schiff explains: “Look at the housing market, look at the auto market! These big sectors have been made possible by cheap money and you can’t take it away without some serious losses being exposed.”
Despite its recent price decrease, gold continues to prove its value as an instrument of wealth retention. If you had gold at the beginning of the year, you’ve not only insured your wealth against a market over-saturated with cash, you’ve increased it. Buying gold and silver is essential to diversifying any portfolio. Start 2017 knowing you’re hard earned wealth is backed by real money.
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