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Krista Dibiaz (0:50)
Welcome to Ask An Advisor. Where we here at Team Clark go deeper on all things money and investing. I'm Krista Dibiaz here with Wes Moss. Hi Krista, how are you today?
Wes Moss (1:01)
Good, very good.
Krista Dibiaz (1:02)
And so the Fed, big news headliner, finally cut rates last week and you're going to talk about how that's going to affect us and especially things like mortgage rates, what they're thinking for sure. And then what is everyone's biggest fear around retirement?
Wes Moss (1:19)
Yeah, I got a question at a presentation the other day about what keeps you up at night. So I'm going to discuss, discuss where that conversation went.
Krista Dibiaz (1:27)
Okay. And then of course, we'll get to your questions. If you have a question for Wes or for Clark, you can go to clark.com ask so we'll start with the.
Wes Moss (1:36)
Fed because this is the interest in the Fed ebbs and flows. There are periods of time, maybe, let's go back a couple years when rates were kind of at zero and they're staying put. The Fed tends to go in cycles. They'll get to a level they like and they'll stay put. And the meetings don't get a whole lot of fanfare because everybody already knows that they're just going to keep them where they were or are and there'll be these long periods of time where rates will just stay exactly the same. The interest goes up for all of us when they're starting to make a change. There was the big change was a couple years ago when we had inflation and rates were close to zero. Then the Fed went on this campaign where they were hiking interest rates almost every time they met. The question was how much are they going to hike and what is that going to do with mortgage rates? And I pulled a mortgage Chart because this really relates back to a lot of this has implications for home buyers. It has implications for anybody with loans. There was a loan I was reviewing with a family the day after the Fed cut and they said, well, my loan just went down by a quarter of a percent because their loan was tied to the short term rate, usually the short term rate plus 2% to 3%, but it's based on that short term rate. So a lot of people have credit or interest rates that are tied to the fed funds rate or the so far rate, which will move almost in line with the Fed rate. So low rates just means cheaper money for people, less interest. So it's a good thing for the most part. And there's always two sides of the coin. But if I look at this chart around mortgage rates and I go back to, let's go back to what I would call somewhat normal times. If you go back to November of 2018, we were in the 4.9 range for the 30 year fixed mortgage rate. And then we went on this long cycle, particularly after Covid hit in 2020, where the Fed dropped rates to literally to zero. And then that pulled every all other rates lower. And at one point In January of 2021, the average 30 year mortgage was 2.65%. And we had a really long period of time where it was right around that 3 range, a little lower than 3, a little higher than 3. And that was when the great lock in happens. The other thought here is I was in the same recent event that I did. There were a couple of different mortgage folks there and we started talking about the mortgage business. Well, let me fast forward in October of 2023. So about two years ago mortgage rates really peaked at almost, it's 7.79%. So it went from 3 to almost 8 in the course of just a couple of years. And I said, well, how's the mortgage business? And the answer was, honey, ain't nobody moving. And it's slow as molasses. Oh wow. I heard slow is molasses for a long time now. It has just recently started to pick up. And if I go to the last 30 year fixed mortgage rate is 6.13. So that's still pretty high relative to locking in a rate at 3%. But compared to when we almost got to 8% two years ago, now we're down to 6.1 and the Fed just cut interest rates. So the question is, does that continue to go lower or was the mortgage rate just in anticipation, knowing that rates were probably going to Start coming down. And that's the question mark. The reality here is that higher rates have really almost. If you're in the mortgage business, it's been tough in the last couple of years. If you have a 3% mortgage, you're not moving, you're locked in, and you have very little motivation to start looking for houses and trade in your 3% mortgage for a 6% mortgage. I think we'll see real activity if it can creep just below 6. That's a psychological level. But the tug and the pull and the difficulty around what the Fed's trying to figure out, and I think of it as almost just this barometer of where the risk lies. And it's only two things. The Federal Reserve cares about maximum employment, and they care about price stability, which is inflation. And they always want to balance those two. They want high employment and moderate to low inflation at 2%. The problem with, with where the Fed is right now, and that's why there's such intrigue around these meetings, what are they going to do? What are they going to do is that they don't have a clear picture of which is a bigger risk. Inflation going back up, that's a risk. Jobs slowing down too much, that's a risk. So if you were to look at the balance on if the needle of the speedometer is all the way to inflation, we know we've got to increase rates. If the needle is all the way over to the risk of a slow job market or a worsening job market, then we know we need to cut rates. The needle is right in the middle because there's still this risk. Inflation's still right around 3%, which is considerably higher than the 2% level the Fed wants. And job creation has slowed dramatically. We've only seen about, on average, over the last quarter, 29,000 new jobs added. That's super slow relative to the 150,000 per month that we were getting used to. So they really had to thread the needle here. And essentially what Chairman Powell said is that, look, we've got risk to the downside in the job market, and that seems to be slightly bigger of a risk than more inflation. And that's why they cut rates. So that's the reality of where we are right now. They're trying to take a cautious approach to making sure that the job market doesn't get too weak that we've seen weaken. It's still not weak. 4.3% unemployment, still relative, very low. But here's what the stock market does. So. So, number one, it Means for, for or all of us, if we have credit tied to the fed funds rate, which a lot of people do, whether it's mortgage related, business loan related, credit card related, in some cases, not in all cases, you're gonna see a little bit of relief. Not a whole lot. A quarter of a point is not that much, but it's not nothing. The second implication is for investors what happens to the stock market? And we went back and pulled data around. How does the market act when, when the Fed cuts, when the market is already at a really close to an all time high. So we looked at instances from Fed rate cuts since 1980. There were looking at periods when the stock market was, was within 2% of an all time high and the Fed cut rates. And that has happened, Krista, 20 times since 1980. 19 of those 20 times a year later the stock market was higher. Hmm, interesting, isn't it? That is so 95% of the time over since 1980. So we're going back 40 plus years. You've seen a 95% historical data that shows markets are up on average 12 months later to the tune of an average of 12.9%. So the second implication here is what does that mean for stock market investors? Companies like lower rates, particularly smaller companies that have to pay on loans that are tied to the federal funds rate. Federal fund rate comes down better for a lot of different sectors and particularly smaller companies. Which stands to reason it makes sense that you've seen stocks actually do well. So at least that's where we are today. The Fed is still trying to thread the needle. They don't know if they need to cut rates dramatically. That's why they just went 1/4 of 1%. They're cautious about the job market. But slightly lower interest rates usually on balance is a good thing for A investors, B, anyone that has any loans and C, if this trickles through to the mortgage market and we see the average 30 year fixed below 6%, I think we'll start to see some real housing activity.