Tomorrow FED will be announcing which is likely a rate hike to the current FED's funds rate. This rate is important because it sets the minimum for banks and entities who set borrowing costs. At current rate it is 2.25% - 2.5% and expectation for tomorrow is a 0.75% rate hike making it 3% - 3.25%.
The question with today's post is will the FED's funds rate rising be bad for the stock market? To answer this question I will break out what I understand of the rate and how it effects companies bottom line.
US Bond Rates
At the beginning of this post is an image of the 3 month US Treasury Bill rate. Currently at 3.29% it means if you purchase $1000 bill you will earn 3.29% annual rate for 3 months. Lets look if it was 6 months bill rate.
What about further outdated years rate:
(All charts and data courtesy of ycharts.com)
What the US bond rates are telling us is the public are expecting US rates for borrowing dollar is on the rise, and on the rise at a rapid rate. The 1 year rate is going at 4.03% which has a spread of of +1.5% more than the FED's funds rate.
In conclusion the market is pricing higher rates while the FED even if they raise rates tomorrow at only 0.75% they are behind the curve with what the public is currently seeing at present time.
Corporations Money Flow
There are signs where new money entering stock markets is slowly declining. One sign is the 2022 IPOs, chart above courtesy of Nasdaq.com is showing the $ amount put into new stocks for 2022 which is at a decade low!
(Courtesy of www.hvst.com)
The US corporate debt as % of US GDP is hitting an extreme would not be ideal for corporations to grow. Chart above only goes up to 2016 and can illustrate that in past economic times when the borrow exceeds a certain percentage of the US GDP it has lead to a recession. Now where are we with this debt to % US GDP rate?
(Courtesy of St. Louis Fed)
Not only is the ratio today exceeded that of 2016 it has almost doubled since then. Yet as of 2022 the US economy has avoided a recession, the gray areas on the chart. However is this really the case or data is being manipulated. Every ramp up you see in the near future there is a gray area equating to a recession. The wider the gray bar the longer the recession. Will this time really be different? History does not repeat but it rhymes. We are going to have trouble times ahead.
Conclusions
The public is trading like rates are at 4% but the FED is planning to raise rates only up to 3%. The money flowing into new investments and borrowing rates from corporations are at a downtrend. I will add that the FED is not only increasing borrowing rates but will be executing Quantitative Tightening (QT).
The short definition of QT is the FED is selling their Treasury Bills and Bonds that they have bought over the years from the opposite of QT in Quantitative Easing (QE). This process of QT is essentially removing $ dollars from the market creating less money for public use. With less money but same amount of assets it can potentially a drop in asset prices, which include stock prices.
None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!
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