My regular readers can blame me for being obsessed with the rise in interest rates over the past few quarters. As an investor I find it nearly impossible not to have these rate hikes as my primary concern, not only in regard to the markets but also the economy. At this point it is hard for me to fathom a scenario where the Federal Reserve doesn't trigger a recession in 2023, perhaps a meaningful one.
Rising rates are the potential death knell for the consumer, who powers 70% of the US economy. The typical household has lost nearly 6% of its buying power since the beginning of 2021 thanks to the scourge of inflation. Consumers have been able to dip into savings or take second jobs to maintain their standards of living to this point. According to a recent poll, 43% have accessed savings recently to pay monthly bills. However, with the personal savings rate at the lowest level since the 2008-2009 financial crisis, this is not sustainable. Credit card debt is also rising at its fastest levels in more than two decades even as interest on that debt continues to rise. One half of working-age Americans have reduced or stopped saving for retirement as well.
In addition, rising interest rates make things that much harder for the already beleaguered consumer to buy when it comes to most big-ticket purchases. A typical $500,000 townhouse here in Delray Beach, Florida, would have cost $2,900 all in on a monthly basis at the start of this year. That same house with mortgage rates now above 7% goes for $3,850 a month. This is why housing activity, a key economic driver, has slowed markedly in recent months.
The last car I bought came with a 0.9% interest rate on the purchase loan for five years. With the average car loan now above 6% and likely heading closer to 8% as the central bank continues to hike its fed funds rate, those halcyon days are long gone. This spike in rates should curb auto manufacturing, another key engine for the economy.
Corporations also are impacted by higher rates, which is one reason in recent months I have done a full review of every stock in my portfolio. I have purged nearly all my holdings in small-cap biotech, fintech, adtech or electric vehicle concerns that are likely to need to raise more capital over the next two years. They either will need to dilute shareholders at lower prices or finance operations via more expensive debt. I have also looked at my profitable names that do carry large amounts of debt to ensure that they don't have significant debt maturities they will need to roll over during the next couple years as they will need to do so at higher rates.
Rising interest rates, a consumer in dire straits and higher debt service costs are just a few of the woes Corporate America will face as we move into 2023. They are key reasons Goldman Sachs recently projected that S&P 500 earnings growth will be flat next year. The $64,000 question for investors is what multiple the market will pay for no earnings growth with inflation still at its highest rate in 40 years. This is especially true given this is no longer a T.I.N.A. (there is no alternative) market, with yields on the risk-free two-year Treasury bond topping 4%. I guess we will all find out together in the New Year, one which I will go into on a continuing cautious footing with my own portfolio.