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Uncertainty was the Problem, Not Interest Rates
March 18, 2022 at 10:36 am - by Kevin Flynn
Uncertainty was the Problem, Not Interest Rates
The Fed increased interest rates by a quarter point on Wednesday. Atlas shrugged. No, I’m not talking about the Ayn Rand classic, though you can certainly see some parallels here. The pundits’ dire forecasts of plummeting share prices were overcome by the spirit of true capitalism this week. Interest rates were never the problem. Uncertainty was.
I’m going to go out on a limb here. Now that we know the Fed’s plan, the market will reach record highs in 2022. There’s just too much momentum for it to be otherwise. Retail investors, which the so-called “experts” have yet to figure out, caught a taste of success in the past two years. They like it and want more. That desire will keep the market moving.
Amazon Isn’t Bothered by Rate Hikes
Higher interest rates won’t affect Amazon (AMZN). An announcement on Monday to do a 20-for-1 split on June 6th was followed by a 5% surge in their share price. They’re also doing a $10 billion buyback. The justification they offered was to make Amazon stock “more accessible” to retail investors. Did anyone tell them Robinhood lets you buy fractional shares?
Amazon’s stated reasoning is a smokescreen. This split is about positioning. Traders and institutional investors don’t buy fractions. They buy whole shares. The stock split will bring share prices down to $146. Most retail investors will still buy that in fractions. The big players will buy bundles of it. That should eliminate some volatility for your AWS providers.
Ironically, this is a retail concept. Companies like Costco (COST) make their money by bundling goods at a lower price per unit and selling them in cases or cartons. Costco is up 71% since this time last year. Walmart (WMT), which has moved away from bundling and offers lower prices on smaller units, is only up 11.54%. Their margins and average sale are both smaller.
Fed Moves Won’t Make a Dent for Consumers
The oil companies and oil-producing nations don’t care about rising interest rates in the United States. They’re riding the wave of inflation that will not be halted by the Fed’s paltry efforts. Brent Crude (BNO) went up nearly 9% on Thursday. ExxonMobil (XOM) and Chevron (CVX) both gained at least 2%. The price of gas at the pump? Still going up.
The Fed acted too late to make a significant difference. Only one director voted against the 0.25% increase this week. Jim Bullard from the St. Louis Fed wanted a 0.50% increase. The rest of the gang thought that would cut too deep. They’re clueless. Anyone with the tiniest bit of economic knowledge knows we need to go back to pre-pandemic levels (1.55%).
Instead of ripping the band aid off, the Fed chose the slow walk. The market can shrug off those quarter point increases, which is good. Consumers, who are the victims of inflation, won’t see any relief from them. They will see credit card and mortgage rate increases. Those, and higher gas prices this summer, are certainties. So are the Fed’s rate hike plans, finally.
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About the Author
Kevin Flynn
A former financial professional and founder of AdvisorScale Financial Writing, Kevin lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.
