The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Good = Bad ?

03/09/2020

For most families, the monthly mortgage payment is their biggest expense, which is largely determined by the interest rate.  The lower the rate, the more affordable the mortgage.  Over the last year, millions of Americans have refinanced their mortgages at lower interest rates, improving their monthly cash flow.  That’s great, isn’t it??

Investors know the supply and demand for stocks determines the value of the stock.  If more people want to own Apple stock, their demand for that stock will bid up the price for that stock.  It works the same for bonds.  When investors demand a particular bond, the price rises, which reduces interest rates.  For example, if demand for a $10,000 bond drives the price up to $10,500, the 4% interest payment of $400 drops the effective interest rate to only 3.8%  ($400/$10,500).

Now, why would demand for bonds increase?  Demand flows out of stocks to increase demand for bonds, pushing down interest rates.  Market analysts see falling interest rates as falling optimism in the economy.  The stock market is a place for optimists.  As they lose their optimism, they sell out of stocks, and the stock market drops.  That’s NOT great, is it??

So, what is good for consumers is bad for investors.

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