Jul 26, 2023 - Economy

Stocks and housing stay buoyant despite higher interest rates

Data: Standard & Poor's; Chart: Axios Visuals

For a variety of assets, the last 18 months have amounted to an eventful voyage that ended up back where it started.

Why it matters: The resilience of stock and housing prices — against a backdrop of epic monetary tightening — has created an unusual situation in which Americans' wealth is holding up fine, despite substantially higher interest rates.

  • If you had told people in January 2022 that the ensuing year and a half would bring a 5 percentage point rise in short-term interest rates and 7% mortgage rates, not many people would imagine assets would take a round trip.

By the numbers: The massive upward move in mortgage rates last year did have a negative effect on home values — but it was remarkably brief and mild.

  • The S&P/Case-Shiller national home price index peaked in June 2022 and bottomed out in January 2023. As of May, it was only 0.9% below the peak from 11 months earlier.
  • In January 2022, 30-year fixed-rate mortgages averaged 3.45%. That number was 6.43% in May 2023, yet home prices rose 5.8% in that span.

That is terrible news for housing affordability. But it is preventing the vicious cycle of defaults, foreclosures and economic crises triggered by the 2007 home price crash from repeating itself.

Meanwhile, the stock market has nearly returned to its January 2022 highs, as Axios Markets author Matt Phillips noted Wednesday. At Tuesday's close, the S&P 500 was 4.77% below its Jan. 3, 2022, high.

  • In total return terms — if you bought the S&P that day and reinvested dividends — your portfolio would be down a mere 2.3%.
  • The surge has been particularly concentrated among mega-cap tech stocks poised to profit from artificial intelligence innovations, and has been driven more by expectations of future earnings growth — higher price-earning ratios — than near-term profits.
  • Still, higher stock prices contribute to resilient growth through wealth effects (people who feel flush spend more money) and by tilting corporate executives toward hiring and investment.

Between the lines: There's also information contained in a major asset class where prices have not rebounded — bonds. The Vanguard Total Bond Market ETF is down 14.5% since the end of 2021 and has hovered in a narrow range for nearly a year, since the Fed began its ultra-aggressive hiking phase.

  • That's a different way of saying that longer-term interest rates have remained elevated over the last nine months rather than retreating back to the pre-2022 levels.

The bottom line: Stocks and housing are buoyant, but not because of expectations the Fed will reverse its rate hikes soon. It's happening in spite of expectations that money will remain comparatively costlier for years to come.


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