The American stock markets appear to be looking tired. If you are putting new money in the market, you better watch out. At the current pace of difference between the yields on 10 year Treasuries and the yields on S&P 500, there is not much wiggle room to make money. In order for the markets to go up from here, one of two things need to happen:
1. The components of S&P 500 need to earn more profits; this is already a challenging task. 2. The 10 year Treasuries need to yield way above S&P 500. For the past several years, if you have been the kind of person who liked to save for a rainy day, you are essentially screwed. By who? By the US Federal Reserve of course! In order to save the US housing market from complete collapse, the Fed made all kinds of changes and drove the interest rates to the ground. The result was that the 10 year Treasuries on which American mortgages tend to rely on, went to historical lows, resulting in more and more people going from under-water to above-water. Now the Fed finds itself in a big hole. For various reasons, they are unable to raise interest rates and the markets kind of love it - as they are addicted to the low interest rate environment. This has created a sort of a new housing bubble. Why do I say so? I lay my case in plain English so it's easy to understand: Imagine you want to purchase a house worth $500K. In this tough world where they pay paltry salaries, you someone scavanged $100K to put as down payment. The bank lends you $400K at 3.5% fixed rate for 30 years for a monthly mortage of ~= $1796 (yeah, in America they have these 30 year fixed rates, in addition to Uncle Sam letting you deduct mortgage interest from your taxable income. Lucky guys!). Now fast forward to say ... into the year 2025. What would happen to that same house price in 9 years if the mortage rates went from the current 3.5% to say 7%? If the owner wants to sell that same house for $500K (assuming he/she does not want any profit), when the prevailing rates in 2025 happen to go to 7%, the new buyer of that same house would have to pay ~= $2661 in monthly mortgage (assuming similar mortgage type and down payments as the original owner). Mind you, in most cases, every seller wants a tidy profit from the sale of their house, so he/she may want to sell their house for > $500K. In our example, in order for the new buyer to afford that same house for $500K at 7% mortgage rate, one of two things would have to happen in 2025: 1. Salaries would have to go up across the board to afford that extra payment of $865/month ($2661-$1796). This is unlikely to happen. 2. The price of that house would have to fall. This is a more likely outcome. That would mean - back to under-water; which nobody wants. So forget about interest rates going up in a meaningful manner. For most middle class folks who are buried under humongous college debt and other obligations, the game is over before it even started! Good luck! Jim Fernandes Scarsdale NY.
