Stocks Stay Put – Get Your Record Low Interest Rates Before They Are Gone

Stock Markets Take The Long Way Home

The markets got off to a rocky start on Monday as the S&P 500 fell 1.8%. The Volatility index (which measures fear in the market) surged 35% – one of the biggest one day move in volatility in the past 10 years. It appears that investors still have the time period of 2007 – 2009 freshly in their minds and are ready to head to the exits at the first sign of trouble.  And thinking back to that period in time who can blame them?

However, the markets showed their resiliency and rallied back on Tuesday & Wednesday and by the end of the week on Friday had recovered all of Mondays losses and even added a point or two.

For the week ending March 1, 2013 the S&P 500 finished at 1,518 – a net gain of 2 points for all of it’s effort.  The S&P 500 is now higher by 6.2% for the year 2013.

In the Photo Section is a one year chart of the S&P 500:

(See Chart of The S&P 500 in The Photo Section)

On the economic front the news was very good. Consumer confidence came in 10% higher than what anyone had expected and is now at it’s highest levels since November, 2011.

Other positive economic news included:

1. Initial Claims for Unemployment (344,000 – Lower than the expected 360,000)
2. New Home Sales (437,000 versus the 380,000 expected – Highest New Home Sales in over 4 years)
3. ISM Manufacturing Index (54.2 versus the 52.5 expected – Highest since June 2011)

With more evidence of an improving economy, I would like to use the remainder of this weeks column to discuss that while an improving economy is certainly welcome news to everyone, there will be one drawback to a strengthening economy – and that drawback is that the all time record low interest rates for borrowing will be coming to an end.

These Historical Low Interest Rates  – Which Have Reversed The Decline in Housing Prices – Could Be Coming To An End Soon

Last September we showed that the Local Patch Newspapers are providing timely and relevant community information to their readers when Patch Newspapers published our thesis that the bottom was in for housing. 

For people who read and acted on the information in this article, they were able to make a purchase of a property before the most recent increases in real estate prices.

The good news is that prices for real estate are still near multi-year lows and there appears to be further confirmation since the publication of that article that the Real Estate crises is now behind us.

To illustrate that real estate prices are starting to rise again, In the Photo Section we have a 20 year chart of the Price Index for housing in the greater Seattle area.

(See Chart of The Home Price Index For the Greater Seattle Area in The Photo Section)

As you can see by the chart, homes in the greater Seattle area reached their peak in 2007. Then the Financial Crises hit and caused a record amount of foreclosures which flooded the market with supply and was the primary factor in the drop in home values.

Housing prices in the greater Seattle area fell around 30% from their peak and settled at levels that they sold for in the year 2004.

The chart also clearly illustrates that prices for homes fell for almost five years before home prices reached their bottom in early 2012.  Since then home prices have been on a slow climb upward.

Now the primary catalyst for the increase in Home Prices are:

1. Reduction in the number of foreclosed homes for sale
2. An improving economy and job market
3. All time low interest rates thanks to the Federal Reserve quantitative easing policies (more on this next)

Do Not Wait Much Longer To Lock In These All Time Low Interest Rates

This is worth repeating – do not wait much longer to lock in these all time low interest rates.

In Response to the Financial Crises of 2007 – 2009, the Federal Reserve used all of their monetary tools and even invented some new ones to drive interest rates for borrowing money down to  all time record low rates.

The primary reasons the Federal Reserve created these artificially low interest rates were to:

1. Stimulate the economy
2. Allow banks the opportunity to rebuild their reserves
3. Allow the USA Government to borrow a record amount of money at low rates.
4. Stop the decline in housing prices.

For the past four years, the Federal Reserve has wanted you to borrow money and purchase things so badly that they are practically giving money away for (almost) free.

The borrowing costs for a home has never been lower than it is Right Now. 

In the Photo Section is a chart of the 30 year mortgage rates that goes back to 1977 that shows that today’s interest rates are a once in a lifetime event:

(See Chart of The 30 Year Mortgage Rates in The Photo Section)

Today the rate for a 30 year mortgage is at 3.53%.  As the chart illustrates, today’s low rate is unique. The interest rates over the past 40 years have been as high as 17% and have generally ranged between 6% – 8%.

Looking at the chart you should reach an inevitable conclusion – and that conclusion is that in the future the interest rates on home mortgages have only one direction – higher.

At some point in the future with an improving economy, an improving job market and an improving financial condition of banks, either market forces or the Federal Reserve will create actions that will send interest rates much higher.

We urge readers who it makes sense for their financial condition and situation to lock in these all time low rates for the following:

• New home purchase
• Home refinance from a higher rate to a lower rate
• Purchase or lease of a new automobile.

While no one can know when for sure – after years of  interest rates going lower – it is likely that interests rates could begin rising higher in as soon as  4 – 12 months from now.

Closing Thoughts

The S&P 500 has put in a series of lower highs and lower lows over the past 30 days. Short term this usually signals lower prices. However, if the S&P 500 can close higher than 1,530 (only 12 points from here) then this technical pattern would be broken and the market would probably head higher from there.

Also noted this week is that sentiment has gotten much more negative which can create the foundation for another move higher in the market.

Generally though it is not a good idea to be a buyer of stocks when they are near their highs like the S&P 500 is now.

Last week we recommended going to where the values are and considering Brazil as a starting point for research for allocating current funds.

Brazil is trading down 24% from it’s highs of 2 years ago. The ETF for Brazil is EWZ.  Purchasing the EWZ buys you shares in all of the big companies of Brazil with one purchase (much like buying the S&P 500 index fund).

As with all investments ideas we recommend that you consult your financial adviser to determine it’s suitability for you.

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John Patrick Bray, CPA, is President of Bellevue-based Reliance Investment Management LLC  a Registered Investment Advisor Firm.

This communication reflects the opinions of Reliance Investment Management LLC and is being provided for informational purposes only and is not intended as a recommendation, an offer or solicitation for the purchase or sale of any security referenced herein or investment advice. It is being provided to you on the condition that it will not form the primary basis for any investment decision.  We recommend that you consult with your investment advisor before the purchase or sale of any securities. The information contained herein is of the date referenced and Reliance Investment Management LLC does not undertake an obligation to update such information. Reliance Investment Management LLC has obtained all market prices, data and other information from sources believed to be reliable although its accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The securities mentioned herein may not be suitable for all investors.