Can We Have It All?
Last week we spoke of record highs for the stock markets and historic lows for interest rates — again. This week we go deeper with the main question–can these conditions continue into the future? Generally, stocks increase because of a stronger economy and a stronger economy typically will raise interest rates because of the increased threat of inflation. For example, it is not unusual for rates to rise on the same day that stocks are rallying and we have already seen rates rising from their lows set just about two weeks ago. But we must remember that we are citing normal trends and it has been a long time since we have witnessed anything normal in our economy.
As we look back, we can see that our stock market has recovered dramatically since the depths of the recession. And one of the conditions present during this long recovery period has been record low rates. Certainly, these low rates have presented favorable conditions for investing in the stock market, since there were virtually no returns for leaving money sitting in a bank. Over time, the stock market’s recovery was dramatic, but the economy’s recovery was anything but dramatic. The economy’s recovery could be best described as “slow and steady.”
This slow and steady recovery kept rates low for a very long time. It was expected that this was the year that rates started back up and the Federal Reserve Board’s move to raise short term rates in December of last year increased those expectations. The stock market’s progress was thus halted, at least partially because of this expectation of higher rates. However, as the year came to a close, the economy slowed to a crawl and negative foreign news dominated the headlines during the first part of 2016. Thus, when the Fed meets this week, few are expecting another hike in short-term rates. Will rates continue to stay low while stocks shine? The markets will be watching the Fed’s statement — especially for any inkling regarding a strengthening economy on the way.
The Weekly Market Update
Rates on home loans rose in the past week as stocks continued their record run. Freddie Mac announced that, for the week ending July 21, 30-year fixed rates rose to 3.45% from 3.42% the week before. The average for 15-year loans increased slightly to 2.75% and the average for five-year adjustables moved up to 2.78%. A year ago, 30-year fixed rates were at 4.04%, more than one-half of one percent higher than today's levels.
Attributed to Sean Becketti, Chief Economist, Freddie Mac -- "Post-Brexit volatility tapered off over the last two weeks, allowing interest rates to bounce back a bit from their lows. This week, the 30-year fixed rate increased 3 basis points to a still-quite-low 3.45 percent. With the Federal Reserve on hold and the UK monetary authority taking at least a one-month breather, we don't expect any significant movement in rates in the near-term. This summer remains a favorable time to buy a home or to refinance an existing home loan."
Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.