Q2 earnings are approaching and we’ve been seeing much of the same over the past few weeks. As the Russia-Ukraine war rages on, we’re seeing headlines continue to fearmonger, while reality plays out much differently. Through increased sanctions in Russia, we’re not experiencing much blowback, and don’t expect to.
Let’s take a deeper look at what’s actually happening this month.
Mortgage Rates Are Up
Mortgage rates have passed 4% for the first time in many months. For the consumer, this move is creating higher expenses for taking out new loans and mortgages. However, rates are still relatively low historically and we may see the massive inflation in housing prices slow down.
The positive comes for financial institutions because they can charge more for mortgages and are still providing limited rate increases on savings and CDs. Therefore, the banks are creating a larger spread for themselves and making more money.
Federal Reserve interest hikes are twofold. The Fed wants to stabilize inflation through interest rate policy and promote maximum employment. It's a tricky exercise and the Fed often fails to create a smooth landing for those goals. The underlying economy and companies we invest in are doing well.
According to Edward Yardeni, “Among the most unsettling issues in the financial markets is the impact of rising interest rates on the federal deficit. Net interest paid by the federal government totaled $382 billion over the 12 months through February. That implies that the government paid an average interest rate of 1.6% on the $23.8 trillion in publicly held Treasuries during February. Here are the net interest costs at higher average interest rates: 2.0% ($476 billion), 3.0% ($713 billion), 4.0% ($951 billion), and 5.0% ($1,189 billion).”
Quarterly Earnings on the Horizon
We continue to expect earnings growth. With companies expecting volatility, they set their earnings bar very low making earnings beats much more achievable.
Remember, the goal is long-term. And the financial strength of the companies we invest in should outlast any Fed maneuvering. Most of these companies have been preparing for the Fed to raise rates for years.
If you have questions about how recent market activity impacts your retirement plan, schedule time to talk to our team of experts.