Many have inquired about interest rates and what that may mean for them and the markets. On Wednesday, the Federal Reserve raised the federal funds rate by an additional 0.25%, the 10th time it has done so in just over a year. This is the fastest pace of interest rate hikes in history and is leading to increased borrowing costs everywhere. Credit card rates have reached an all-time high of over 20%, home equity lines of credit are averaging 8%, and 30-year mortgages are around 7%. We expect this to be the last increase for some time as the higher rates lead to decreased economic activity and lower inflation. The entire goal of the rate increases is to lower inflation, and all indications are that it’s working. The good news is that interest rates on savings and money market accounts are dramatically better than they were a year ago. The average money market yield is over 4%, offering an alternative to bonds and dividend paying stocks for conservative investors.
While we are seeing decreased lending and GDP growth, companies themselves are still making money. The banking sector has been under pressure as a result of these rapid rate increases as evidenced by the Silicon Valley Bank collapse, First Republic, and now possibly PacWest Bancorp. But broadly speaking the economy has been resilient and fully 70% of companies reporting earnings are beating estimates and giving positive guidance. Yesterday, market bellwether Apple reported better-than-expected numbers on earnings per share, revenue, and profit margin – bringing in over $94 billion dollars in the first quarter. Having patience and investing in quality assets is a good way to weather these interest rate cycles.