By Daniel McGarvey, Portfolio Analyst

In July, the Federal Reserve raised interest rates to 5.25%-5.50% in what could potentially be the last or second-to-last hike in this cycle. However, despite a resilient Q2 GDP print of 2.4%, Chair Jerome Powell pointed out that the full effects of tightening are yet to be felt. The labor market is still quite tight, consumer spending and confidence have been rising, and revolving consumer credit use has increased around 35% since the last lows in mid-2021.

It is entirely possible that this long-anticipated recession may be avoided, but the rosy headlines shouldn’t lead us to ignore the possibility of some economic pain.

An area worth watching closely is housing market affordability, which has been declining despite increasing inventories.

Not only are home prices increasing again, but financing costs are remarkably stretched relative to risk-free rates. The average 30-year mortgage rate is almost 300 basis points higher than the 10-Year Treasury rate to which it is typically benchmarked (see chart below). That spread is similar to levels seen in 2009 and 1986, and it indicates that consumers are paying a high premium for housing.

30-Year fixed mortgage average in the US market yield on the U.S. treasury securities at 10-year constant maturity, quoted on an investment basis

We do not believe that the market will crash like it did in those years, and the economic environment is quite different now, given the stimulus of recent years, but housing affordability does have ripple effects.

The effect of rate hikes may not yet be completely felt in other sectors, like banking, and it stands to reason that both businesses and consumers should be increasingly less inclined to take on debt.

Additionally, we are a bit surprised to see high-yield credit spreads as tight as they are, but before long, we expect that markets will need to price in higher credit risks. As the saying goes, monetary policy can act on “long and variable lags.”

July was another impressive month for stocks as the S&P 500 returned 3.36%, and the Dow Jones Industrial Average had its longest winning streak since the 1980s. The Bloomberg US Aggregate returned -0.07% as the 10-Year Treasury rate rose to 3.97%, and high-yield spreads tightened to 3.79%. As of the beginning of August, the market is only giving a 23% probability that another rate hike with occur by year-end. The market is not factoring a rate cut until March of next year. The odds of a rate cut in the month of March are currently 58%.

Asset Class and Equity Class Snapshots and Market Indicators















Charts provided by YCharts, Inc. and Federal Reserve Bank of St. Louis

Material discussed is meant for general/informational purposes only, and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary, therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions.


Daniel McGarvey, Porfolio AnalystDaniel is a Portfolio Analyst at Stonebridge Financial Group and works on portfolio analysis and other related tasks. When away from the office, Daniel spends his time playing guitar, reading, and exploring the outdoors.