Federal Reserve Continues Interest Rate Hikes And Housing Market Sees Spike In Mortgage Rates: Forbes AI Newsletter

TL;DR

• To the surprise of no one, the Fed raised rates by 0.75 percentage points this week, with further hikes expected through the rest of 2022 and into 2023
• Mortgage rates have spiked off the back of the rate increases, with the average 30 year fixed mortgage now at 6.35% against just over 3% at the start of 2022
• Tech remains unloved by the market, despite still generating trillions of dollars in revenue, presenting an opportunity for investors
• Top weekly and monthly trades

Subscribe to the Forbes AI newsletter to stay in the loop and get our AI-backed investing insights, latest news and more delivered directly to your inbox every weekend.

Major events that could affect your portfolio

The long awaited meeting of the Federal Open Market Committee (FOMC) finally came this week and the hard facts weren’t really a surprise to anyone. The Fed raised rates by 0.75 percentage points which was exactly in line with what markets and analysts had been expecting.

It’s the third straight rate hike which takes the base rate to its highest level since before the 2008 Global Financial Crisis.

This rise was effectively already priced into markets, from stocks to bonds and even mortgages. What wasn’t necessarily as clear prior to the announcement was the Fed’s outlook on the state of the economy going forward.

The data and commentary doesn’t make for happy reading.

Their projections show economic growth stalling to just 0.2% for 2022 before improving slightly in 2023 to hit 1.2% for the year. Still not great. Unemployment has been famously low as the employers deal with a tight labor market, but this is expected to slowly change with the unemployment rate projected to increase from 3.7% through to 4.4% in 2023.

Despite these disappointing figures, the plan is still to increase interest rates in the coming months, with the Fed suggesting that the base rate could rise to 4.6% in 2024.

The prospect of the Fed putting the brakes on an economy that already appears to be headed for a recession has understandably spooked markets, and we’ve seen some significant drawdowns this week off the back of the announcement.

Of course, the reason behind all this is to try to tame inflation. So far the Fed is expecting that these measures will be able to do that, with the headline rate projected to fall back down to between 2.6 – 3.5% in 2023.

—

One of the biggest concerns with the way rates are heading is the impact on the housing market. As of right now the average rate for a 30-year fixed rate mortgage is at 6.35%. This is up significantly from early 2022 when the average rate sat just over 3%.

It means that new home purchases have become a lot more expensive. Here’s an idea of just how much more expensive.

At a mortgage interest rate of 3% and a 30 year term, a $500,000 loan would cost a borrower just over $2,100 each month. Right now, that same loan at the new average rate of 6.35% is going to cost over $3,100 per month.

That’s $1,000 more each month, at a time when the economy is sputtering and inflation remains at record highs.

It’s not good news for the housing market and Fed chairman Jerome Powell said as much in the recent announcement. Powell stated that the housing sector was likely to go through a correction after experiencing a period of “red hot” prices.

It’s not surprising to hear this point of view, when you consider the Fed is likely to raise rates even more from where they are right now.

This week’s top theme from Q.ai

Tech has been selling off for a while now but there have been some signs of life returning. Many companies in the sector rallied quite hard through July and into early August, and have pulled back a bit in recent weeks.

Nevertheless, the businesses at the top of the tech tree probably aren’t going anywhere anytime soon. Companies like Apple, Amazon, Microsoft and Google are still generating insane cash flow and continue to grow and find new profit centers.

A theme we noticed early in 2022 was that the tech sector had sold off potentially more than it really should have, particularly in relation to more traditional companies in the Dow Jones 30. While the industry has looked overvalued at times in recent years, this rapid drop in prices has presented an opportunity for investors.

The problem is that we’re not likely to see smooth sailing in the overall market for a while.

Luckily, we found a way to make a play on tech while also potentially reducing the downside risk of a general market downturn and packaged it into the Tech Rally Kit.

It works through the use of a pair trade that goes long on the tech sector by investing in a mix of the Communication Services Select Sector SPDR Fund (XLC) and the Technology Select Sector SPDR Fund (XLK) and short on the Dow Jones 30 through the use of an inverse ETF.

These positions are rebalanced on a weekly basis and it means investors can profit from the relative movement of tech to the Dow. Even if the overall market goes sideways or even down, investors can win if the tech sector holds up better.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Graftech International (EAF) – The industrial manufacturer is one of our Top Buys for next week with an A rating in Technicals and Quality Value. Revenue was up 48.2% over the past 12 months.

Enfusion Inc (ENFN) – The investment industry SAAS company is one of our Top Shorts for next week with our AI rating them a F in our Growth and Technical factors. The company lost $176.4 million in the 12 months to June 30th.

Clearfield Inc (CLFD) – The fiber connectivity company is one of our Top Buys for next month with an A in our Quality Value and a B Growth. Earnings per share have grown 8.78% over the past 12 months.

Chemocentryx Inc (CCXI) – The biotech company remains one of our Top Shorts for next month with our AI rating them an F in our Low Momentum Volatility, Technicals and Quality Value factors. Earnings per share is down 14.39% over the past 12 months.

Our AI’s Top ETF trade for the next month is to invest in oil, the VIX (volatility index) and high growth companies and to short China and the Pacific region. Top Buys are the United States Brent Oil Fund LP, the ARK Innovation ETF and the iPath Series B S&P 500 VIX Short-Term Futures ETN. Top Shorts are the iShares China Large-Cap ETF and the Vanguard FTSE Pacific ETF.

Recently published Qbits

Want to learn more about investing or sharpen your existing knowledge? Qai publishes Qbits on our Learn Center, where you can define investing terms, unpack financial concepts and up your skill level.

Qbits are digestible, snackable investing content intended to break down complex concepts in plain english.

Check out some of our latest here:

All newsletter subscribers will receive a $100 sign-up bonus when they deposit $100 or more.