The Other Real Impact of Rising Interest Rates

Tesla (TSLA) and Microsoft’s (MSFT) earnings got a mixed reaction in recent days. Now the market’s focus will intensify on earnings as we head into next week…

That’s when a slew of high-profile mega-cap stocks are all due to report, including Apple (AAPL), Alphabet (GOOG), Amazon (AMZN), and Meta Platforms (META).

After a positive start to the year, investors will have one thing on their mind…

Is there any substance behind the recent rally, or have the Fed’s rapid rate rises finally started to bite?

The Fed’s interest rate decision is due out on Wednesday (February 1), along with key jobs and manufacturing data. That should give us another clue.

Once again, I suspect the market has gotten ahead of itself…

Last week, we saw how these rising rates steadily eroded retail sales. That’s a key component of personal consumption and the economy.

Today, I’m going to look at how rates have affected another hugely important asset class – homes.

While many investors are awaiting earnings results next week, I’ll also have my eye on how home prices are tracking…

Home Price Growth Is Slowing

From 2015 to 2018, annual home price growth in the U.S. hovered around 5–6%. From there, it steadily declined to around just 2–3% by the end of 2019.

However, COVID and the Fed’s unprecedented money printing cycle led to home price growth taking off like a rocket.

By mid-June 2021, annual home price growth was pushing 20%. That’s a five-fold increase in the space of just around 15 months.

After a brief dip in 2021, growth then accelerated into the start of 2022.

You can see the tail end of that growth spurt in the U.S. Case-Shiller Home Price Index below…

After topping out at 21.3% annualized growth in April 2022, the chart shows a rapid decline…

By October 2022 (the most recent data), that growth had dropped to 8.6% – the lowest level since October 2020.

Now to be clear, we’re not talking about home prices dropping on an annualized basis. Instead, it’s a huge deceleration in price growth off the back of incredible (and unsustainable) growth.

The question for homeowners now (and the economy) is where this is all going to land…

When home prices are increasing strongly or steadily, homeowners have confidence to go out and spend.

That increase in personal consumption creates economic growth and extra jobs.

Right now, this decrease in home price growth comes on top of higher interest rates and inflation, which have already sapped consumer confidence.

So if home price growth can level out (or just modestly increase), that’ll make a massive difference to consumer confidence because it’ll help shore up the value of homes.

That’s why I’ll also be watching another Case-Shiller Home Price Index chart, which shows month-over-month growth.

Below is the most recent data up to October 2022…

On a monthly basis, home price growth went negative in July last year. Because the annualized data takes in a full year, this recent negative growth hasn’t yet wound its way into the longer-term data.

So, I’ll be watching whether the improvement from negative growth of -1.6% in August to -0.8% in October continues to ratchet higher.

And it’ll be key if the data starts to stabilize somewhere above zero.

If this decline takes another leg down, though, that would put further pressure on consumers and further tighten their belts.

That would add a further handbrake to the economy. So, I’ll be watching home price data like a hawk.

Next week is shaping up to be a massive one in the markets.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a few One Ticker Trader members thank Larry for his recent guidance on a trade recommendation…

I was glad to see you address the AAPL trade. It doesn’t surprise me that you’d get concerned emails. The expectation is that every trade must be profitable, or something is seriously wrong.

My wife the past few nights would say, "AAPL has a big loss, what do we do?” (We both trade our retirement accounts, but she takes her lead from me.) Each night I tell her, "Be patient. The market is over-extended, and the next two weeks are going to be a bit crazy. It’ll work out."

Traders need to understand that your bias can be right, but your timing could be a little early. With options, as long as the market doesn’t make a “crazy” move against you and you have plenty of DTE, then chill.

Anyway, I’ve been enjoying this service. When Larry makes a trade call, I examine it, see the logic to it, and take it. It’s nice to have confidence in a stock trade picker for once. – Richard R.

Thanks for the recent email explaining the Apple put option. This goes a long way to build confidence with your subscribers. People are looking for trust out there. Keep up the good work and make it a great day. – Ronald F.

Thank you, Larry for this update. It’s very comforting and gives more confidence that the recommended trade is under your watchful eye.

I added to the position at $1.54 a few days back and the additional position I sold off this morning at $2.00. This reduces my cost/exposure to a bit lower than my original entry at $4.30 to now approximately $3.85. Thank you again. – Naresh V.

Thanks for sending in your thoughts! If you have any questions or comments, then you can always send them to [email protected].