Direction of Interest Rates Presents Big Challenge for General Motors
As the Fed struggles to wrangle interest rates, big-ticket purchases that require financing will suffer.
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The fizz came out of the post-election rally in a big way late last week. By market close on Friday, the NASDAQ was off better than 3% and the small-cap Russell 2000 fell over 4% on the week.
The SPDR S&P Biotech ETF XBI got clobbered by more than 5% on Friday alone as biotech had its worst week since 2020. The trigger for this sell-off was the planned nomination of Robert F. Kennedy Jr. to head health and human services (HHS) under the new presidential administration.
I personally believe that these worries are overblown and more likely to impact the huge drug makers like Pfizer PFE than the small- and mid-cap biotech/biopharma equities that I spend a good portion of my week researching. Besides, pharma and biotech stocks have been woefully underperforming the overall market for almost a decade now, so there is not a ton of froth here in the first place, especially compared to so many other sectors of the market.
That said, until all this shakes out, investors probably should stick to small-/mid-cap biotech/biopharma names that are already profitable and/or have products that are approved and that are seeing solid revenue growth.
Toward that end, I added exposure to names like Lantheus Holdings, Inc. LNTH via covered-call orders late last week. Clinical stage biotech/biopharma names that are years away from potential commercialization probably should be a no-go for the timebeing.
The much bigger concern for me right now is the direction of interest rates. The yield on the 10-year treasury has jumped to nearly 4.5% from just over 3.6% since the central bank starting to cut the federal fund rate at their FOMC meeting in mid-September. Hardly the movement desired by Chairman Powell or anticipated by the market. The "last mile" on the inflation front continues to be challenging.
Obviously, rising mortgage rates are the last thing the moribund housing market needs right now, given existing home sale look like they will post their lowest levels since 1995 this year. This will also continue to be a major headwind for the faltering commercial real estate sector that has to refinance hundreds of billions of dollars’ worth of loans at much higher rates in the coming quarters. On its current trend, the delinquency rate on commercial mortgage-backed securities against office properties should move over the 10% level in the first quarter of this year.
Higher interest rates are not a good thing for high-ticket items that tend to be financed and will make 2025 tricky for the likes of General Motors GM and Home Depot HD. It also makes servicing the massive and fast-growing U.S. debt harder to accomplish. This continues to be the 800-pound gorilla in the room that most of the media continues to give short shrift to while they obsess about the minutiae around the incoming administration’s nominations.
Finally, higher rates have completely erased any risk premium from investing in equities, a point Doug Kass, to his credit, has hammered home repeatedly on his Daily Dairy over the past few weeks. So, while I did put some money to work on last week’s sell-off, I am keeping plenty of "dry powder" on hand should this be the start of a larger move downward for the markets.
At the time of publication, Jensen was long PFE (via covered-call orders), LNTH and XBI.
