The interest rate myth

"Hey - you can still get a 15 year fixed mortgage for under 4%. That is a big deal. And less than half of the 8% we were all begging for in the 1980's. So cheer up folks, and stay in the market if you would like."

Wow! What a ride yesterday in the stock market! If not for that Cat 4 hurricane in Florida, the 800+ point drop in the Dow would have been the news of the day. Why? People either have short memories, or were not around during the Reagan years. Even though the Fed has jacked our rates, and will probably do it again before year's end, they are laughable. Laughable because they are so low. I really thought when our GDP went north of 4%, the Fed would take our rates higher than they are today.

I was around during the Reagan years. And the Carter years. And of course, during the Obama years. Here is the difference between Reagan economics and Trump economics as I see it. Jimmy Carter almost killed our economy. By the time Reagan became President, it was a real mess. Inflation, and stagnant growth. The term stagflation was coined. Reagan got the economy going with HUGE tax cuts and other market stimuli. The economy started to roar, and the Carter inflation was still high. So, the sky high interest rates the Fed used under the Carter Administration stayed intact.

How high were interest rates? We bought our current house in 1984. There was no such thing as an 8% fixed rate. Most had to use "ARM mortgages" or some variation thereof. Then with inflation still being high, it took a while to get interest rates down enough to get a 8% mortgage. When that happened, there was a major stampede of people rushing to refinance their homes. 

During the Obama years, the economy was not sick like it was under Carter - it was just asleep. Obama himself told the American people to get used to 2% or less GDP. It would be the new norm. The economy was so lethargic, the Fed kept interest rates at close to zero. Then came Donald Trump.

Trump took this sleeping giant of an economy and woke it up. Tax cuts, killed thousands of regulations, and so forth. The stock market and economy became red hot. So hot, inflation once again became a concern. So, the Fed started to slowly raise rates. Big deal. But yesterday, the timid and clueless started to freak out, dump stocks and race to the bond market. Net result - 800 point drop. 

Donald Trump fully believes that if the Red Team holds Congress, 4% GDP will become more common than uncommon. Many economists agree with him. However, with the good comes the not so good. In 2019 and beyond, look for interest rates to keep rising. That is, until the economy starts to cool. Or if the Democrats control Congress.

Hey - you can still get a 15 year fixed mortgage for under 4%. That is a big deal. And less than half of the 8% we were all begging for in the 1980's. So cheer up folks, and stay in the market if you would like. Most analysts feel there is still a big up side on some of the tech stocks as well as some of the "widows and orphans" stocks. It is all good, so enjoy the ride.