Following another bad day in the US for stocks, our market is expected to have a negative session today, but shoppers are shopping mad, with August retail numbers really hot. It looks like the interest rate rises that are killing stock prices aren’t hurting retail sales.

But why?

Let’s go through the reasons why investor returns are shocking now and they’re all linked to rising interest rates.

To the stock market and the S&P/ASX 200 index is down 8.18% and 4.92% alone over the past month. I know someone who has an average 3-year return of 5% on his well-balanced investments between stocks and bonds but it was 8.6% per annum before this year!

He can blame interest rate rises for that. These rises have also taken the US-based S&P 500 index down 13.78% in a year and 16% over the past six months, as rate rises got serious.

These rate rises have KO’d the bond market. Reuters has written a story entitled: 'Bonds in line for worst year in decades'.

It showed that at the time of writing the really safe US Treasuries were down 11% and were set for the worst year since at least 1973! The same bad return tale applied to Eurozone government corporate bonds.

The two main ways people get good financial returns (i.e. stocks and bonds) have had a shocker of a year in 2022.

Why is this happening?

To save the world from a Great Depression that could have cut your super in half or blown it away, central banks took cash rates to 0.1% here, and even negative in other countries. Now that the world’s economies are coming back, central banks are raising interest rates to kill the inflation created by saving the world economy. Also, there’s inflation because Covid has locked down China, which has pushed up costs and inflation.

So has Putin’s war, which has pushed up oil costs and inflation.

So now interest rates have risen to kill inflation but that has hurt stocks and bonds, which is why returns are terrible.

But this is the price we’re all paying because of a crazy few years since we heard about the Coronavirus for the first time.

Given all this bad market news and rising interest rates, how come retail spending surged in August?

The August reading of the Mastercard Spending Pulse rose 25.1%, compared to August last year. And “rose 27.4% compared to pre-pandemic levels, with jewellery sales up 107 per cent in August compared to a year ago, apparel jumping 83 per cent, consumer electronics spiking 66.2 per cent and home furnishings lifting 51.6 per cent,” The Australian’s Eli Greenblat reported.

Accommodation spending was up 131.5% but was about 5% lower than three years ago before we talked about something called Covid!

So how come we’re spending so hard, even with rising interest rates and falling stock markets and now falling house prices? Try these:

1. A third of households don’t have a mortgage.

2. A third of households rent but not all these people have received rent increases, though they soon will.

3. These big numbers compare to two Augusts when a lot of Australians were in lockdown. Sure, lots of people bought online but others would never buy jewellery or home furnishings without actually seeing them.

4. Interest rates have been rising but it takes a few months for people to start to feel the pinch of the 2.25% rate rise, and a lot of people are still on fixed-rate home loans.

In 2023, we’ll see the full impact of these rate rises but we have to hope Dr Phil Lowe of the RBA and Jerome Powell of the US central bank don’t go too far, too fast and put us into recession. This is a big reason why stocks are falling over the past few weeks. “The Fed’s paved the way for much of the world to continue with aggressive rate hikes, and that’s going to lead to a global recession, and how severe it is will be determined on how long it takes inflation to come down,” said Ed Moya, a senior market analyst at Oanda.

This guy might be wrong when it comes to Australia and the US, while the UK is probably already in recession. And the EU has the Ukraine war threatening recession, but the point is that big stock market players now think a recession is a chance, so they’re dumping stocks.

If inflation starts to fall in the US in October and November, rate rise fears could be canned and stocks will surge, but this is a game based on hope.

I don’t like basing my investing strategy on hope, but as a long-term investor, hoping that markets eventually boom after a big sell-off is supported by history. You just have to be patient.