One of the enduring mysteries of current economic strength is how little effect the Fed's rate hikes seem to have had — not generating the recession or crisis that every previous rate hike cycle over the past 70 years has.
The increases, from zero down to the current range of 5.25% and 5.5% in just a year and a half, have affected parts of the economy: new home sales, for example, have fallen from an annual rate of just 830,000. Before the interest rate rose as low as 543,000, it was still only 661,000. Industrial production has remained essentially flat, and is only now showing signs of improvement.
But the US economy is not sensitive to interest rates anymore. Moses Sternstein of the Random Walk blog shared this chart, originally produced by Bank of America, that shows the percentage of the S&P 500 SPX index made up of so-called asset-light sectors, which include technology as well as health sector companies.
While it is limited to just the stock market, the broader economy is also less capital intensive.
The real impact of higher interest rates on technology companies is that it has made them more efficient, he said. Sternstein noted that as interest rates began to rise, technology companies focused more on cash flow rather than sales growth. “Investors may not like it because although profit is good, growth is the exciting part, but from a 'wheels in the economy' point of view, profit works well,” he says.
As for the market, Sternstein shared a chart showing the difference between B and BB rated junk bonds. “Either a dead bad cat bounces with a lot of egg on everyone's faces, or you go after it, we're back to the races again,” he said.
The Standard & Poor's 500 index ended February at a record high after rising 5.2%, and the index rose 21.5% over the past four months alone.
