Market Insight September 19, 2022

This week we provide insight on what we can learn from the Real Estate Market and one of the largest names in investing Ray Dalio.

Mortgage rates are the highest since 2008

What is it? 

As stocks struggle to move higher, the real estate market is also getting worse. 

“Mortgage rates surged past 6%, the highest level since November 2008, worsening already rampant affordability concerns.”*

Many people may be stuck renting or even moving as the affordability of homes remains an issue. 

“Demand for mortgages has remained at a 22-year low since the end of August. High home prices and tight inventory levels have pushed affordability to its worst level in 37 years.”*

Why does it matter?

“‘The record low interest rates that we’ve seen over the last two and a half years have really allowed home price growth to outpace income growth,’ Andy Walden, recently told Yahoo Money. ‘In this affordability landscape it would take a combination of a 40% rise in incomes, roughly a three percentage point decline in 30-year rates, or a 30% pullback in home prices.’”*

Real estate is a big factor in the economy as it accounts for much of the wealth and is linked to interest rates. We see this news as an indication that stock market prices may continue lower ahead of unfavorable real estate data. If conditions such as the Fed continue on the path they are on it could be detrimental to stock values. Stocks and real estate prices may come back to more of a fair value range as opposed to reaching all-time highs. 

Ray Dalio expects stocks to fall 20% if Fed Fund rates rise to 4.5%

What is it? 

Like many others in the industry, we respect the insight Ray Dalio has on the markets. 

“Billionaire Ray Dalio, founder of one of the world’s biggest hedge funds, has predicted a sharp plunge in stock markets as the U.S. Federal Reserve raises interest rates aggressively to tame inflation. ’I estimate that a rise in rates from where they are to about 4.5 percent will produce about a 20 percent negative impact on equity prices,’ Dalio wrote in a LinkedIn post on Tuesday.”**

While we do not have a specific target such as down 20%, we believe that prices could find some support if they fall to the range of highs made in early 2020. Unless conditions change for the better, it seems like stocks are positioned to fall closer to that range. 

“His comments came the day data showed U.S. consumer prices unexpectedly rose in August. The inflation data raised fears of another outsized interest rate hike next week and sent stock markets into a downward spiral.”**

Why does it matter?

As some people were ready to buy the dip in the market earlier this year, they may be reconsidering that position. Since asset prices were elevated like never before from things like stimulus checks and low-interest rates, they could take longer to recover than some may have anticipated. 

“‘A significant economic contraction will be required, but it will take a while to happen because cash levels and wealth levels are now relatively high,’ Dalio wrote. ‘For example, while we are seeing a significant weakening in the interest rate and debt dependent sectors like housing, we are still seeing relatively strong consumption spending and employment.’”**

As rates rise, things start to fall apart at a certain point with the market contracting. While cash levels and employment are holding up, they could become much worse depending on the increasing interest rates used to combat the continued inflation. 

We plan on remaining in more secure investments to protect the capital. Once riskier assets begin to gain more traction we will invest there as we see fit. Most broad-based ETFs are down with the market. Because of that, we are looking into opportunities outside of what people can get in a broad ETF. That is one possible advantage to our tactical investment approach as opposed to a buy-and-hold strategy. 

Other articles we found interesting this week:

Stock Market Slides Despite Railroad Labor Deal; Adobe Plunges

Markets quiet down ahead of mid-tier US data

Always Cut Your Losses Short

Current 401(k) portfolio

Our last portfolio reallocation: 5/19/2022. 

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The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach. 

Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.

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Sources:

*Gabriella Cruz-Martinez. “Housing: Mortgage rates breach 6% for first time since 2008. 9/15/2022. Yahoo Finance. https://finance.yahoo.com/news/housing-mortgage-rates-breach-6-percent-140013849.html

**Reuters. “Bridgewater’s Ray Dalio expects stocks to fall 20% if rates rise to 4.5%”. 9/15/2022. Reuters. https://www.reuters.com/markets/us/bridgewaters-ray-dalio-expects-stocks-fall-20-if-rates-rise-45-2022-09-15/

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Craig Stahlecker

Craig Stahlecker

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IMPORTANT DISCLOSURES:
The information provided is intended to be educational in nature and is not intended to be a recommendation for any specific business or tax strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation of services.

Communications such as this are not impartial and are provided in connection with advertising and marketing. This material is not suggesting a specific course of action or any action at all. Prior to making any business or tax planning decisions, an individual should seek individualized advice from a personal financial, tax, legal, or business consultant professional that takes into account all of the particular facts and circumstances of an individual’s own situation. No person associated with Breakaway Financial Group LLC is a licensed attorney, and the information contained herein should not be considered legal advice.