203: How Do Interest Rates Affect the Stock Market?

Have you ever wondered how interest rates affect the stock market? In this week’s episode, Josh and Austin break down this complex relationship in plain language, discussing how changes in interest rates can impact different sectors of the stock market. From company valuations to investor reactions, they cover it all! Don’t miss out!

 

Main Talking Points

[1:32] – Cost of Borrowing Increases Alongside Interest Rates
[4:56] – Consumption & Spending Decreases as Interest Rates Go Up
[7:17] – Interest Rates Affect Investor Sentiment
[9:18] – Discount Rate Affects
[14:34] – Interest Rates vs. Bond Market Competition
[16:42] – Dad Joke of the Week
[17:44] – Interest Rates vs. Dividend Yield Competition
[20:35] – Increased Cost of Capital Affecting Investment Decisions
[20:35] – Currency Exchange Rates Affecting International Competitiveness
[25:57] – Housing Market Influenced by Interest Rates
[27:48] – Economic Growth Expectations & Their Impacts
[29:12] – Final Thoughts on How Interest Rates Affect Stocks

 

Links & Resources

 

Full Transcript

Welcome to the Invested Dads podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, hey. Welcome back to the Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I am Austin Wilson, co-portfolio manager at Hixon Zuercher Capital Management.

Josh Robb:

And I’m Josh Robb, director of wealth management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?

Austin Wilson:

Please, please, please subscribe if you’re not subscribed already. So hit that plus, follow, subscribe. Whatever the button looks like on your podcast player, mash it. And we would love it if you would leave us a review on Spotify or Apple Podcasts or wherever you’re listening to this, so that other people can’t help to find us and hopefully be helped as well. So today, Josh, we’re talking about the relationship that changes in interest rates have with stock prices because on the surface level it doesn’t make a lot of sense. Bond prices and stock prices, they should be different. But bond prices move inverse with yields and interest rates is what we’re talking about. And stocks have some very key ways that those rates impact stocks specifically.

Josh Robb:

Yeah, because you would think, hey, why would how much somebody paying interest, why would that affect what a stock price is doing or why a business in general? Just because I can get more interest on my whatever, why does that matter?

Austin Wilson:

Exactly.

Josh Robb:

So we’re going to find that out.

 

[1:32] – Cost of Borrowing Increases Alongside Interest Rates

Austin Wilson:

We’re going to find that out. And I guess as a matter of background, looking back since the beginning to middle of 2022 is really when interest rates started taking off. And so that’s been about a year and a half of some rapid interest rate increases. And a lot of that can be attributed to the Federal Reserve raising interest rates. So they’ve raised really short-term interest rates, which is what banks and financial institutions borrow at. But then really all interest rates across the board have also risen in tandem with that to varying extents.

Josh Robb:

Because if it costs more for a bank to borrow or what they’re getting over, then they’re going to adjust how much they’re charging and collecting on that.

Austin Wilson:

Yeah, so interest rates are up across the board and that has done bad things for the bond market. So bond prices, because when yields go up, that payment as a percentage of the price, the price goes down. That’s how bond prices work, and that is how yields have gone up over this time. But stocks, again, we’re going to visit how yield changes impact stocks. So we’re going to have 10 reasons. The number one reason that yields changing can impact stock prices as interest rates go up, the cost of borrowing for companies specifically, think of the publicly traded companies that you own, also goes up. What does this do? Well, this weighs on corporate profits and corporate profits ultimately make stock prices go down in the long run.

Josh Robb:

Right because stocks prices are a representation of a profit distribution to the owners of the company, right?

Austin Wilson:

Or expected profits.

Josh Robb:

Right, or future profits, yes.

Austin Wilson:

Exactly.

Josh Robb:

So if those expectations change, in a sense, the price will change to reflect that new reality.

Austin Wilson:

Yep. So if you think about how cost of borrowing impacts these companies’ bottom lines, yeah, the easy stuff to think about is the interest that they’re paying when they’re borrowing money for just funding operations or expanding or funding new projects. Those increased costs weigh on profits, and that weighs on people wanting to own stock, which makes them sell it and price goes down, right?

Josh Robb:

Yep.

Austin Wilson:

Another one is that maybe higher borrowing costs discourage companies from taking on new projects, from wanting to grow more, because if interest rates are up and it’s going to cost them more in the long run to fund that project, maybe it just doesn’t financially make sense. So that can also mean that growth will be lower potentially, which makes people not want to hold the stock. They sell it, the price goes down. Another one is debt repayment. So if you have existing debt obligations, you may face higher interest payments, especially if you’re using like a floating rate loan, that can go up and that can definitely put disposable income down by putting your interest rate-

Josh Robb:

Or if you’re like those high growth companies who aren’t turning a profit yet, all new borrowing is at a higher rate, so your payments are going to go up from that way.

Austin Wilson:

Another factor is that you might be deemed less credit worthy because those rising borrowing costs can raise concerns whether you’re going to be able to pay your debt or not. And that’s not a good thing for stock prices either. And then another one is across the landscape, maybe you are more exposed to having an impact to higher interest rates because you use more debt to fund growth opportunities than other competitors. Well, that can make you a little bit less competitive if you’re unable to do that where your competitors maybe can. So definitely some pressures as it relates to the costs of borrowing there.

 

[4:56] – Consumption & Spending Decreases as Interest Rates Go Up 

Austin Wilson:

Number two, consumption and spending. So as interest rates go up, that can lead to reduced spending. So think about it, if you’re especially using debt to pay for things and the cost to borrow goes up, the interest rates go up, that can make you spend less money on things. So for example, Josh, you go buy a car, brand new car, okay?

Josh Robb:

Yep.

Austin Wilson:

Taking out a car loan, a few years ago or a couple of years ago, you could have got a brand new car loan at 4%-

Josh Robb:

Or less, yeah.

Austin Wilson:

… or less, depending. Now six, seven, eight-

Josh Robb:

Eight to nine, I think.

Austin Wilson:

… nine on new cars, is that going to make you change your thinking? It probably will.

Josh Robb:

Or you’re buying less of a car.

Austin Wilson:

Or you’re buying less of a car. That’s just the consumer loan side of things in general, but this also impacts housing. Mortgage rates have followed suit as interest rates have gone up. The 30-year mortgage as of the time of this recording is really high compared to what we’ve seen for 20 years.

Josh Robb:

Yeah, 3% the last couple of years, yes.

Austin Wilson:

So 20 year highs in mortgage rates really makes people determine, oh, maybe it’s not such a good time to go buy a house right now. And then that has extrapolating impacts. If you’re not buying a house, you’re not doing X, Y, Z project once you buy the house or whatever. There are a lot of different impacts this can spin off to. Another one is business investment, businesses are going to want to consume less. Businesses are going to be deterred from spending more, and that is going to hurt stock prices ultimately there. Changes in interest rates also have a consumer confidence. When interest rates are up, generally that’s not great for consumers because it makes them want to spend less. Lower consumer confidence can certainly weigh on consumer spending, which reflects in stock prices as well.

Austin Wilson:

Another one is that this higher interest rate world can lead to less disposable income. So as rates go up, things cost more. That can make people have less disposable income to buy other things with. And we’ve actually seen that over the last handful of years, throughout this coming out of COVID situation where there was a lot of fiscal stimulus put into the economy. People got checked, people got money. They spent through that money, and a lot of people have less disposable income now because of it. They spent that disposable income, but the people with higher wage earners, they actually still have more disposable income. So we’re actually seeing a bit of discrepancy with that. Interest rates are certainly playing a factor in that as well.

 

[7:17] – Interest Rates Affect Investor Sentiment

Austin Wilson:

Number three is investor sentiment. When you’re looking at how investors feel about certain investments, about companies, about the markets, rising interest rates may say, hey, there could be an economic slowdown ahead. This may mean that people are going to start baking lower expectations into stock prices, which means they could sell them, which means prices will go down. Now what this also could be influenced by is certain market expectations, because if interest rates are expected to continue to go up, that could be really rough. Investor confidence obviously drives stock prices, and if things look better going forward, not worse, then they’re going to be willing to buy or hold those stocks. When you think about risk too, higher interest rates are a risk to the market because again, we talked about borrowing costs rising, and this really just causes people to be a little bit more cautious or companies to be a little bit more cautious on how money is being allocated.

Whether that talks about their investment situation, they may be more cautious with hoarding cash. If interest rates are high, cash is okay. But if interest rates are low, maybe they’re willing to put it to work. Opportunity costs is another one. Rising interest rates make it more risky in terms of buying things like stocks than things like holding cash or fixed income where you can have comparatively less risk for the return profile that you’re able to get there. And then something we’ve certainly seen as of the last couple of years is market volatility being driven by interest rates. And that’s certainly the world we live in 2023. As interest rates have gone up crazy, well, markets essentially lately have gone down in the opposite direction. And a lot of that discussion is relating to how long the Federal Reserve is going to keep interest rates higher and at a higher level than we have seen for decades.

Josh Robb:

Yeah. Some of the movement is a result of just repricing like we already talked about. But this change in sentiment or confidence increase that volatility beyond what you would just say was a repricing of expectations, yeah.

 

[9:18] – Discount Rate Affects 

Austin Wilson:

And then my personal favorite, so number four, using interest rates as a discount rate.

Josh Robb:

Oh boy. So I’ve built these before back in the day, and the easiest way of thinking is if you’re saying, “Hey, I’m going to buy this business, a little lemonade stand on the corner and it makes a couple of dollars a day and I’m going to be able to increase prices over time.” What you say is what is it worth now? And that’s what this discount rate is. You’re saying future earnings, future income, what does it worth today? What am I willing to pay for that business for what I could get in the future? And so you have to adjust that because interest rates.

So walk me through that. But that’s really what, when you talk about discount and when we’re bringing things back to today, it’s really just saying, what is it worth today? And the Power Ball, that was a big, got way up to a billion dollars or whatever, they could take a lump sum or take those payments. The payments were what that big dollar amount was. The lump sum was less than that. In fact, it’s probably about half of that because they were discounting those 30 years to what it was worth today. So that’s what all this is just saying is future earnings, what is it worth today if you were to group it into one timeframe?

Austin Wilson:

And the biggest reason that you can think of this happening is inflation. So if you think about, Josh, if you are going to earn $100 a year going forward for 30 years, that $100 a year in year 30-

Josh Robb:

Is worth less.

Austin Wilson:

… is worth a whole lot less because of how the cost of living, everything, it buys less, right?

Josh Robb:

Yep.

Austin Wilson:

Your purchasing power is less over that long period of time than it would be in the shorter term. Well, we are using an interest rate discount rate to do the same thing. We’re saying, “We’re anticipating inflation adjustments and growth adjustments over time using interest rates in the actual bond market as our proxy to say money in the future is worth less than it is today. That is how discounting works to determine stock prices. And this is really where the rubber meets the road. This whole episode really could hinge on this section here. When you think about interest rates, corporate earnings, we could call them flat to slightly positive. But have they gone up in those future years enough to account for the interest rate change that people are using to discount those future earnings? No.

Josh Robb:

Nope.

Austin Wilson:

And that’s why stock prices are being impacted so negatively by those rising interest rates so fast, so fast.

Josh Robb:

Yeah. And it comes back to all the things you talked about is why does that matter? Well, if it’s part of borrowing, if it costs more, what we thought was going to be the cost where our valuation was a year ago no longer tells us so this discount is exchanged for this new calculation and we overpaid, or the price is too high, now there’s an adjustment, yep.

Austin Wilson:

So this really helps us to determine a present value, a fair value of what a stock is worth today. And those values have come down if we’re using higher interest rates. A lot of this also can be factored into the expectations of earnings values today are less. We’re calculating how much net income a company is going to make for 10 years, but that is all worth a lot less with higher interest rate over time, and their costs are going to be higher. If you’re using an interest rate as a cost for their borrowing over time, you’re going to have to inflate their costs, which reduces their bottom line, which is being reduced even further by a higher interest rate in terms of your discounting. So it’s like a circle that just keeps getting worse and worse when interest rates go up. Now the opposite’s also the case.

When interest rates go down, stocks start looking a lot better a lot quicker. And that is super important to think about that, just all the pain we’re experiencing, and we have experienced, not just in stocks, but in bonds as well, can be undone when interest rates go the other way. Which is not a matter of if, it’s a matter of when. There are cycles that these things go through. So that’s how discounting really is impacting stock prices. And I think that that is the biggest reason we’ve seen such moves specifically in the equity markets over the last handful of months. But something that’s also interesting is when yields are higher, when interest rates have gone up, asset managers actually have a more difficult decision when they’re looking at allocating money for the long term. Because if yields go up and we can lock in higher yield, maybe you have more bonds going forward than you would have historically because yields were so low.

Josh Robb:

Right, because two years ago you were getting 2% on a pretty safe treasury. And so you’re saying, okay, if I need to get 6% total return, I’m going to need to allocate more to stocks because this fixed 2% isn’t getting job done. But now if they’re paying 5% for these still pretty stable, pretty trustworthy treasuries, I can get five. I can lean them a little more over there to get a bigger portion because they’re giving me a bigger chunk of my needed total return.

Austin Wilson:

And your stock price expectations are probably down a little bit because of where rates are as well. So I think that both of those levers are moving in the factor of asset allocators moving towards fixed income and less stocks, which increases the selling, which pushes downward pressure on prices.

Josh Robb:

Especially, and I know you’re going to talk about this, dividends versus the higher interest payments. The risk of price volatility versus if they don’t default a more stable interest payment versus a dividend agree, yep.

 

[14:34] – Interest Rates vs. Bond Market Competition

Austin Wilson:

Number five, we call this TINA. Yes, bonds are a reasonable alternative. The TINA methodology is there is no alternative, TINA, T-I-N-A, which is when interest rates are really low. That’s really what a lot of people say is, “I can’t get the return I need when it comes to bonds, so there is no alternative. I got to buy stocks.” And that’s usually good for stock prices. TINAA, as in there is now an alternative.

Josh Robb:

Oh yeah, you got another A in there.

Austin Wilson:

You got another A, means bonds are once again attractive. Yields are up enough that there still may be a little bit of risk that they go higher, but the likelihood of them shooting double what they had as much as they had moved recently, again, it seems very, very unlikely. You can lock in really good yields and really safe prices right now. And if you look longer term enough for the bond market, so bonds are once again an attractive option. And really, if you look at who’s managing money right now, it’s the people who started in the late ’90s or before have probably seen an era where interest rates have been similar to levels are now or higher if they were in the ’80s or the early 90s. But anyone who’s started since then in this industry does not understand-

Josh Robb:

Especially the last 20 years, yes.

Austin Wilson:

Exactly. So this market is totally different. We’re in a different interest rate era, like a regime that could actually have some staying power and people need to rethink about the way that they’re thinking about things. Like I’ve never been interested in owning bonds personally because rates were so low, they were so unattractive I couldn’t get the growth I needed until recently. I’m 32 years old and I’m like, okay, the risk around bond actually doesn’t sound that bad right now. And there’s a whole world of this going on right now, which is extrapolating towards high volatility because people are selling, buying on a whim because of interest rate moves. So that is five reasons why stock prices are moving as interest rates have moved as well. But we’re going to take a break. Josh, you got a dad joke?

 

[16:42] – Dad Joke of the Week

Josh Robb:

Yes.

Austin Wilson:

Is this something about bonds?

Josh Robb:

It is not, but I do have a joke. I was going to tell you a joke about my chemistry class, but I was afraid I’d get the wrong reaction.

Austin Wilson:

The wrong reaction. I had chemistry class, that was some complicated stuff.

Josh Robb:

If you think about here you are in a school, handing out some pretty crazy stuff to kids and be like, “Hey, don’t mix these two together.”

Austin Wilson:

Don’t mix these two, what are they going to do?

Josh Robb:

Do it all inside there with that big vent thing so you don’t die. And if it breaks, go to the little water hose and rinse your eyes out. Oh man, it just seems like you think of shop class, people losing limbs, but the bigger deal is you’re mixing some volatile stuff in there.

Austin Wilson:

Yep, yep, yeah. I think it, was it chemistry class? We made sauerkraut, like homemade, little chemical reaction, yeah.

Josh Robb:

During World War II things got tough and you had your own little victory gardens, all that. Do you know what they used to make sauerkraut during World War II?

Austin Wilson:

Cabbage.

Josh Robb:

Yeah, cabbage. Yeah, it didn’t change. It was still cabbage.

 

[17:44] – Interest Rates vs. Dividend Yield Competition

Austin Wilson:

All right, we got five more. Five down, five to go. Another way that stock prices are impacted by moves in interest rates goes along with the one we just talked about, dividend yield competition. When interest rates rise, the yield on fixed income securities, this is what you were alluding to, may become more attractive relative to the dividend yield you get in terms of the cash payment for the stocks that you own. Again, reduces, potentially, the demand for dividend paying stocks. Now one way that we’ve seen this play out is there’s a couple of sectors that you think of as bond proxies. You hold these stocks because they have-

Josh Robb:

Good returns.

Austin Wilson:

… bond-like dividends.

Josh Robb:

Like a utility.

Austin Wilson:

They’re safe, they’re stable. Utilities, real estate, sometimes-

Josh Robb:

Energy.

Austin Wilson:

… consumer staples, sometimes energy. But yeah, utilities and real estate are the most, I would say, yield sensitive. And when yields go up for bonds, those areas of the market are sold off way more than the rest of the market. So you’ve seen real estate stocks from two aspects, which we’re going to talk about, get absolutely slaughtered as interest rates have gone up. Number one, they’re less attractive from a dividend standpoint compared to bonds. But number two, what do real estate investment trusts use a lot to fund their operations?

Josh Robb:

Debt.

Austin Wilson:

Debt. And when they’re using debt to operate, they’re taking on a lot of debt at what? Higher rates, which really hurts their bottom line.

Josh Robb:

Double whammy.

Austin Wilson:

It is a double whammy for real estate, similar to utilities. Utilities often operate with a lot of debt, notice a lot of bonds out there for utilities, municipals, a lot of those sort of things as well. But they are being less favorably treated because bonds are more attractive right now. So that’s the yield comparison right now. Another thing is we get to this world where you start comparing stocks and bonds and one of the things that we look at is earnings yield. Now we talk about price to earnings ratios all the time, and that’s an easy way to gauge the relative expansiveness or cheapness of a given stock or the market in total.

Now that would be price to earnings ratio, the price of the stock divided by the earnings of the stock. And you’re get a multiple of this, so it’s usually say the S and P is trading at 17 times earnings. That’s kind of where we’re at right now compared to historical, maybe that was 18, 19, 16, it depends on what time period you’re looking at. But you can gauge whether something’s expensive or cheap based on that. Well, earnings yield is how you can compare this to bond a little bit. You could say the opposite. So this would be earnings over price, and that would be saying that the earnings yield for the S and P 500 is four and a half to 5% right now, 4.75 I think ish. But that’s actually now for the first time in 20 years-

Josh Robb:

Low.

 

[20:35] – Increased Cost of Capital Affecting Investment Decisions 

Austin Wilson:

… lower than the interest rate that you’re getting on a US treasury bond, really any of them. But specifically people look at like two or 10 year bonds and that is making bonds even more attractive than stocks. So you can lock in that. And that is something that is an unusual situation that we are in right now. Number seven, capital costs. We alluded to this a little bit earlier, but financing operations. A lot of companies, I would arguably say most companies, use debt in some way, shape or form. And actually it’s not a bad thing because there’s really two ways to raise capital. Number one, debt and number two, issuing stock. And they have different costs to them and you weight them with how much you use them. You can get your weighted average cost of capital.

So if you think about the cost of debt, those interest rates are higher, that proportion that you’re issuing debt to cover of your capital has now gotten a lot more expensive. So obviously this is going to weigh on profitability because you’re going to have to pay that interest. It’s going to weigh on investment decisions. And we talked about this is going to weigh on even valuation of projects because you’re valuing a current project to say, “How much money is this going to save me today based on future-“

Josh Robb:

Yeah, if I’m a factory and I’m going to open a new line and I’m going to borrow to get all that stuff started. And I’m not going to get the money back yet, so I’m borrowing this cost knowing though, I’ll get it. But if it was going to cost me 2%, 4% to borrow, okay, I could be profitable in X months. But if it’s going to cost me 8%, it’s going to double the time before I’m making money on this project. And so you’re right, yeah, the weigh, is it worth starting this project now?

Austin Wilson:

Well, it’s all about hurdle rates, really.

Josh Robb:

Yes.

Austin Wilson:

So if I could borrow money at 4%, I could borrow a lot of money at 4%. What did I need to earn for the project to make sense? 4.01%, five, anything more than my cost of borrowing. My return on my investment of capital, it needed to exceed my weighted average cost of capital. And as interest rates go up, the-

Josh Robb:

It’s harder to do that.

Austin Wilson:

… the return rate required goes up even further. We call that economic value added. EVA is what I refer to it in my head. That is the-

Josh Robb:

In your head.

Austin Wilson:

In my head, no one else knows that. But the difference between how much return I’m getting on this project versus the cost that I’m taking on in terms of interest payments-

Josh Robb:

And you have positive number there or else why am I doing that?

 

[20:35] – Currency Exchange Rates Affecting International Competitiveness

Austin Wilson:

… so the hurdle rate goes up significantly when interest rates go up. And this is making companies more cautious about borrowing money for growth. They may just wait to grow as much as they are until interest rates come down and things work in their favor again. So we could be in for a period of less growth for a lot of companies because they’re going to be a little bit more stingy with the projects that they’re taking on right now. Number eight, Josh, currency, exchange rates. How does interest rate moves impact this? I like to think of it as relative strength of currencies versus other currencies in the world.

If interest rates go up a lot and those interest rates are higher than the interest rates of say, a different region of the world that has bonds as well, the Eurozone potentially. So if our interest rates are higher than the Eurozone, what do people need to exchange their currency for to buy our bond because they have higher rates? Dollars. So that makes the demand for the dollar higher. So if the demand for the dollar is higher, it’s going to get stronger related to other currencies. And this has huge impacts on companies with foreign operations, translating that into dollars. If the dollar is stronger, that makes it less attractive, translate those foreign profits and foreign revenues back into dollars, and it also makes imports and exports have a very different balance of how relatively attracted they are.

And companies have to take this into consideration when they’re looking at their balance sheets. They’ve got to buy and sell different currencies because they’re going in different ways because interest rates are moving their value of them. And that is a huge thing that I don’t think people think about a lot right now. So the dollar, last year, interest rates shot up very, very strong, really quick, but in the US, faster than a lot of areas in the world. Things started looking like they would be slowing a little bit there for a little while, so it actually took a little bit of pause. But recently rates have gone up again like crazy, people have wanted those dollars and those dollars have gone up again. And that is going to create some definite interesting opportunities as it relates to the plan going forward because currency cycles are pretty long.

And currency cycles being long means maybe the dollar was as strong as it was going to get last year, but even though it’s strengthening a little bit now, this probably could come back down, which would mean that yeah, we have a headwind right now for international revenues and international investments, but that could turn. And this is really having an interesting dynamic on investor mindsets when you’re looking at allocating between US companies, which are focused most on the US or US companies which have global exposure as well as international opportunities as well. And one thing that is factoring into these yield moves around the world is global economic conditions. The US, by all cases really, looks like it’s doing okay from an economic standpoint. Labor market’s doing fantastic, inflation’s coming down-

Josh Robb:

Spending’s still good.

 

[25:57] – Housing Market Influenced by Interest Rates

Austin Wilson:

… spending is holding up incredibly well, which means yields are probably going to remain higher until something breaks. Other areas of the world have their own situations driving that, and it’s causing a lot of changes in terms of global foreign currencies. Number nine, housing market, 8% for a thirty-year mortgage. It costs a lot more money to buy a house now than it did a couple of years ago. It costs a lot more money to build a house now, so home builders or you building a home, either way, it’s going to cost a lot more money because you’re probably going to be borrowing money to be building that.

That is slowing things down a little bit. With mortgage rates as high as they are, people aren’t as willing to move. Maybe they have a mortgage rate of 3%, 4%, maybe even better than that. Well, if they have an interest rate that low, they’re not going to want to sell their house and take on an 8% mortgage, which keeps the supply down of houses. There’s just not that many houses for sale. And what that does, makes housing prices just crazy. That’s why housing prices, despite having an 8% mortgage out there, they’re flat-

Josh Robb:

Because we haven’t built enough houses to keep up with the growth of population since ’09.

Austin Wilson:

Since ’09, exactly. So there’s a couple factors changing the housing market right now. And we talked a little bit about real estate investment trusts and why those areas of the equity market have been impacted. I actually think there was a period where you could easily go make a decent amount of money flipping houses, right?

Josh Robb:

Mm-hmm.

 

[27:48] – Economic Growth Expectations & Their Impacts

Austin Wilson:

You buy a dump hole and for nothing, it’s a foreclosure. And you take on a 2% mortgage or a 3% mortgage on it and you flip it in a year and you make a ton of money because prices were relatively low and mortgage rates were low and the math worked out. And right now, even bad houses are going for pretty high prices and then you’re taking on an 8% mortgage to do that, the math doesn’t work as much. And number 10, Josh, we kind of hit on it a little bit, economic growth expectations. They have huge impact on interest rates. So when economic growth is forecasted to be higher, interest rates are going to be higher as well. And economic growth expectations come down, interest rates are going to come down and we’re going to have that offset relationship between stocks specifically and interest rates.

But there’s so many moving parts here, and one lever that everyone’s watching to see when this tide changes is the Fed. The Fed has really been driving the ship here. They’ve increased interest rates like 11 times in a year and a half, they’re probably done. But how long do they keep rates high? As long as they keep rates high, there’s going to be some headwinds for things like stocks, for all the reasons we just talked about. When things start looking bad, economically speaking, the Fed may cut rates. And on paper, that sounds like it’s a pretty good thing for stocks from a valuation standpoint. But actually, if you think about the fundamental impact of that, they’re only cutting rates because-

Josh Robb:

Something is wrong.

Austin Wilson:

… yeah, the economy’s going to be in trouble, and that could actually impact revenue and profits from companies as well. So there’s a little bit of an economic situation coming when that time comes. And then once that weakness, that hopefully short period of weakness happens, that’s when you’re going to be in an opportunity where growth is picking back up and rates are lower, which is where stocks like to be.

 

[29:12] – Final Thoughts on How Interest Rates Affect Stocks

Josh Robb:

All right, well thank you for that. There’s a lot that goes on to interest rates and why stocks move because of that. We, a lot of times, disassociate those two things because they’re from two different areas of the market, but they are correlated quite a bit. Thank you, Austin. I think overall, my thoughts on this are, we haven’t experienced this type of thing in a long time. But historically, we’ve survived and thrived in higher interest rates. But the big thing we’ve seen is the market has to price in a new dynamic of higher rates.

We’ve gone a decade and a half with lower interest rates. You got to reprice that. And so that’s what we’ve seen. As a reminder, if you have any questions or thoughts, you can email us at hello@theinvesteddads.com. And then as always, make sure you check our website for any updates about this episode. Our show notes will be there. There’s a newsletter you can sign up for and share this episode with everybody who says, “Interest rates are my favorite topic, please tell me more.”

Austin Wilson:

Obviously. All right, well, until next episode, have a great one.

Josh Robb:

All right, talk to you later. Bye.

Thank you for listening to the The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don’t miss the next episode.

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.