Interest rates have quickly become the story for investors…
The Federal Reserve began its rate-cutting cycle earlier this month. Stocks soared after the central bank announced a 50-basis-point cut.
Bonds and other fixed-income investments were already ahead of the curve, though. Specifically, mortgage rates have been falling for months. They’ve dropped more than one percentage point over the past year.
This trend is great for potential homebuyers. But according to history, it’s also a great sign for stocks… And we could see a 16% rally over the year to come.
Let me explain…
Housing makes up a big part of the U.S. economy. Estimates put spending on home construction and remodeling at around 3% to 5% of U.S. gross domestic product. Meanwhile, all other housing-related spending adds up to another 12% to 13%.
So, all told, U.S. housing makes up 15% to 18% of the economy. That explains why falling mortgage rates are such a big deal.
Mortgage rates, after all, are a crucial piece of housing affordability. Folks can spend less on monthly house payments when mortgage rates are lower. And those benefits ripple out to the rest of the economy.
Again, mortgage rates are now in a major decline. And this trend was well underway even before the Fed cut interest rates. Take a look at this chart of the 30-year mortgage rate…
We’ve seen a major decline in mortgage rates over the past year. Specifically, mortgage rates dropped 122 basis points over the 52 weeks ended September 25.
That’s the largest 52-week decrease since 2019… And it’s a rare setup, too. We’ve only seen 11 other similar setups since 1971.
Obviously, lower rates are good for the housing market. But they’re also darn good for stocks. The table below shows what has happened to the S&P 500 after cases like this…
Normally, you might not think much about the relationship between mortgage rates and stock prices. But with housing’s huge role in the U.S. economy, it makes sense that lower mortgage rates tend to boost the S&P 500.
Similar instances led to 3.1% gains in three months, 5.5% gains in six months, and 15.7% gains over a year. That’s impressive outperformance versus what we typically see in stocks. And the market was higher a year later 91% of the time.
Stocks are back at new highs lately… Yet investors are still looking for any excuse to sell.
Don’t fall into that trap.
Interest rates are falling, and mortgage rates are too. This is stimulus for the stock market. And according to history, it should lead to big gains in the months to come.
Good investing,
Brett Eversole
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Source: Daily Wealth