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Understanding Investments, Expenses & Macroeconomic Variables - FINANCIAL-24

Whether you’re a first-time investor, or a seasoned professional, it’s important to understand the correlation between market factors. Various macroeconomic elements play a big part in determining which way financial assets move. 

Foremost among them are inflation rates, unemployment rates, and interest rates. Of course, there are myriad factors that need to be considered when making investments in financial assets. 

Geopolitical uncertainty – political tension, the threat of war, civil unrest, Brexit and other factors abound.

Understanding Investments

The relationship between financial markets and interest rates is an interesting one. Wall Street companies are heavily dependent on the prevailing interest rate for several reasons. 

At a basic level, higher interest rates – or rising interest rates – are synonymous with higher costs of borrowed capital. In other words, listed companies will be paying more for borrowed money when interest rates rise. This eats into their profitability by increasing costs. One way for listed companies to counter rising interest rates is to pass these costs on to consumers in the form of higher prices. 

This in turn leads to inflationary pressures. If real wages are not increasing at the same pace as rising prices, people are left with decreased purchasing power of their money.

From Macro to Micro: Interest Rates Matter

Therefore, broadly speaking the following relationship exists between equities markets and interest rates: rising interest rates tend to have a negative impact on the price of equities. The converse also holds true. 

When interest rates start falling, the cost of borrowed capital decreases, meaning that companies enjoy increased profitability at constant prices. This boosts stock prices on the New York Stock Exchange, the NASDAQ, The Dow Jones Industrial Average, the S&P 500 etc. When we move from Wall Street to Main Street, it’s important to understand how interest rates affect personal loans. 

On a personal level, rising interest rates are synonymous with higher interest repayment amounts on personal loans. Therefore it is so important for consumers to act decisively when interest rates are low, to avoid the higher rates and higher payments.

The average US household is strapped for cash. In fact, a report released in 2015 indicates that 63% of Americans cannot afford to cover a $500 - $1,000 emergency. This means that an everyday emergency such as a blowout of your tire, a trip to the ER, or a burst water pipe could put you out of pocket. 

This is precisely why it is important to have an emergency stash of cash available. A study commissioned by a leading financial and credit provider found that just 37% of US households have enough money to cover emergencies, with funds of $500 – $1000. 

The remaining 67% of US households would have to borrow against their mortgages, from friends and family, take from savings, or dip into retirement accounts for emergencies. Of that 67%, some 23% of US households would put the expenses on their credit cards.

Poor Savings Necessitate Capital Cushions for Eventualities

In 2014, the out-of-pocket costs for ER visits was $1,233, while the average cost of car repairs in the US was anywhere between $1,747 and $3,324 per visit. Much the same is true for emergency pet care during an animal’s life span. 

These expenses are all but guaranteed at some point or another. Savings are needed to cover these exorbitant costs, but if they don’t exist, alternative forms of financing are required to make up the shortfall.

Many inventive solutions are available to individuals and households in the form of short-term financing. These loans can be repaid within a year, and they are effectively bridging finance to get you from point A to point B when an emergency arises. 

Low-cost loan options such as credit lenders that provide emergency financing are increasingly popular in the US market, with tailor-made repayment schedules at affordable terms.

American households are notoriously poor savers, and this does not bode well for a downturn in economic conditions. According to Pew Charitable Trusts, the average ‘expense shock’ for families is $2,000 per year. Of course, this number depends wholly on the family’s income, and as you move up the income ladder that number rises accordingly. 

Families earning between $50,000 per year and $85,000 per year typically encounter a financial shock that is valued at 13 days’ of income. A $10,000 emergency fund is reserved for people who earn substantially more than $85,000 per annum.

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