Opinion on Interest Rates status going forward

[marko]

Look at it the other way around. Why would companies increasing prices and outstanding debt being devalued (inflation) be bad for stocks?

It's not inflation, it's the higher cost of borrowing money. It would seem to me that if a company's cost of borrowing goes up (recently as much as 3X), their profit would be impacted and thus, a drop in their value.

I've always bought into the 'myth' as FREE866 calls it --and my portfolio tends to confirm, but the charts he shows say otherwise, and I can't buy "the market moves for a myriad of reasons" as good enough if those charts are true and consistent.

There has to be a rational explanation for so many years of exceptional market performance during high interest rates. Further, we've seen great market performance without high interest rates, so where is that correlation?

The market does great with high interest rates, the market does great without high interest rates...how is that possible?

 

[FREE866]

I've always bought into the 'myth' as FREE866 calls it --and my portfolio tends to confirm, but the charts he shows say otherwise, and I can't buy "the market moves for a myriad of reasons" as good enough if those charts are true and consistent.

There has to be a rational explanation for so many years of exceptional market performance during high interest rates. Further, we've seen great market performance without high interest rates, so where is that correlation?

Just trying to make the words and music play together.

The chart I posted was from Ycharts, which is a pretty well respected investment research platform. So, yes, I do believe the information is accurate. And if the information is accurate it does clearly debunk the myth that high interest rates are automatically negative for stocks.



And I think what you posted above also confirms that interest rates are but one variable that dictates market moves. They aren't as correlated as most people believe. As to "why" I can only conclude that yes, the market does move for a myriad of reasons. If it was so simple we could probably all day trade successfully.

 

[marko]

The chart I posted was from Ycharts, which is a pretty well respected investment research platform. So, yes, I do believe the information is accurate. And if the information is accurate it does clearly debunk the myth that high interest rates are automatically negative for stocks.



And I think what you posted above also confirms that interest rates are but one variable that dictates market moves. They aren't as correlated as most people believe. As to "why" I can only conclude that yes, the market does move for a myriad of reasons. If it was so simple we could probably all day trade successfully.

All good points. BTW, I wasn't challenging the validity of your chart or your position, just trying to wrap my head around it.

 

[Montecfo]

I have no idea where rates are headed. But It’s a widely accepted myth that high interest rates is automatically negative for stocks.

The media perpetuates this myth daily with headlines pretty much every day the market moves down. “ fear of higher rates push stocks down……”



It’s so baked into people’s psyche it’s scary even in the face of historical data that debunks that myth.

There appears to be something to that.

 

[Montecfo]

Funny, but I'm guessing that most folks here are viewing increasing rates as an investment positive. I sure am! Most of us are on the other side of the curve where we're reaping the high rates instead of paying them.

Even non- investor friends are commenting on how suddenly they're seeing nice returns.

It's a mixed bag in my view. Higher yield lower stock values.

 

[Montecfo]

OK but WHY? What's the mechanisms driving that? It seems counterintuitive.

It is relatively straightforward. Higher yields draw investment funds from stocks AND higher rates reduce the discounted value of future earnings and income streams of stocks.

Of course no one said this means doomsday, but higher interest rates provide a headwind to stocks and if you notice this has been the case this cycle despite massive stimulus.

 

[FREE866]

It is relatively straightforward. Higher yields draw investment funds from stocks AND higher rates reduce the discounted value of future earnings and income streams of stocks.

Of course no one said this means doomsday, but higher interest rates provide a headwind to stocks and if you notice this has been the case this cycle despite massive stimulus.

The Fed began raising rates on 3/17/22 and raised them ELEVEN times since then. The market is basically flat since that day. How can you possibly say "higher interest rates provide a headwind to stocks" in light of this data?

 

[Gumby]

The Fed began raising rates on 3/17/22 and raised them ELEVEN times since then. The market is basically flat since that day. How can you possibly say "higher interest rates provide a headwind to stocks" in light of this data?

If your "but for" case is that the market would be 20% higher without the rate increases, then I suppose that would be headwinds retarding stock prices.

 

[harley]

It's not inflation, it's the higher cost of borrowing money. It would seem to me that if a company's cost of borrowing goes up (recently as much as 3X), their profit would be impacted and thus, a drop in their value.
<snip>
The market does great with high interest rates, the market does great without high interest rates...how is that possible?

Because they pass on the added costs to their customers, so their profits remain the same in the face of inflated borrowing costs. The way I remember it, back in the late 70s, prices went up (inflation) along with increased borrowing costs (higher rates). But for the most part customers continued to buy, if at a somewhat slower pace until the price increases were countered with income increases and things returned to "normal".

The Fed began raising rates on 3/17/22 and raised them ELEVEN times since then. The market is basically flat since that day. How can you possibly say "higher interest rates provide a headwind to stocks" in light of this data?

Because you're looking at it through the wrong end of the telescope. You're too close. Back off 20 years then look again, and a lot of the sharp edges on the charts will be much smoother.

 

[FREE866]

Because you're looking at it through the wrong end of the telescope. You're too close. Back off 20 years then look again, and a lot of the sharp edges on the charts will be much smoother.

Backing off proves the point even further. Over any 20 year time frame stocks have done extraordinarily well regardless of what rates have done.

 

[street]

Backing off proves the point even further. Over any 20 year time frame stocks have done extraordinarily well regardless of what rates have done.

Can't agree that point and thanks for all the insight on the topic. Very interesting points!

 

[MichaelB]

Higher interest rates definitely affect equity valuations. They are not deterministic, and related factors matter, such as inflation. 1 or 2 years is not enough time to assess the current trend, a complete economic cycle is needed. We are at the beginning of a cycle, not the end.

The economic cost of higher interest rates has not yet worked its way through the system, and there appears to be expectations that the yield curve will correct by near term rates coming down.

If that does not happen, and the yield curve corrects by longer term rates rising, things will get uncomfortable and could stay that way for a fairly long time.

 

[Montecfo]

The Fed began raising rates on 3/17/22 and raised them ELEVEN times since then. The market is basically flat since that day. How can you possibly say "higher interest rates provide a headwind to stocks" in light of this data?

Because it is basic economics. And of course the market had already declined by March 2022 because the Fed told us all higher rates were on the way. And it remains below those highs.

But to put a finer point on it, stocks go up over time. So sometime after 9/11 for example stocks rise above their value on 9/10.

But this does not mean 9/11 did not impact stock values.

 

[Exchme]

Funny, but I'm guessing that most folks here are viewing increasing rates as an investment positive. I sure am! Most of us are on the other side of the curve where we're reaping the high rates instead of paying them.

Even non- investor friends are commenting on how suddenly they're seeing nice returns.

Let's back up a step. Rates are increasing because of inflation and inflation robs savers and rewards debtors. New investors are rewarded as they are buying bonds at higher rates. Existing investors are punished as the present value of their old low interest rate bond declines automatically as rates rise.

If you use BND as a measure of the bond market and correct for inflation, bonds have lost 30% since the end of 2020. That doesn't sound like good news for retirees to me.

 

[Montecfo]

Let's back up a step. Rates are increasing because of inflation and inflation robs savers and rewards debtors. New investors are rewarded as they are buying bonds at higher rates. Existing investors are punished as the present value of their old low interest rate bond declines automatically as rates rise.



If you use BND as a measure of the bond market and correct for inflation, bonds have lost 30% since the end of 2020. That doesn't sound like good news for retirees to me.

Good point. Most retirees probably still nursing losses, though income has risen.

 

[marko]

Let's back up a step. Rates are increasing because of inflation and inflation robs savers and rewards debtors. New investors are rewarded as they are buying bonds at higher rates. Existing investors are punished as the present value of their old low interest rate bond declines automatically as rates rise.

If you use BND as a measure of the bond market and correct for inflation, bonds have lost 30% since the end of 2020. That doesn't sound like good news for retirees to me.

I wasn't talking about bonds. I was talking about 'non investors' who are (re)-discovering the benefits of CDs, MMs, and such.

Sure, everyone is getting eaten by inflation but 5%+ takes some of the sting out of it rather than a mere savings account.

 

[Montecfo]

Well if they pull money out of their mattress and put it in CDs then that is a net positive.

 

[freedom2022]

Fed rate stayed low too long from 2008 to early 2022.
Investment firms borrowed cheap money to invest in stocks, pumping up the stock price.
The fed will stay course on over 5% rate until they see clear sign of inflation will go back down. However, if there are unforeseen circumstances then all bet is off.

 

[pb4uski]

Funny, but I'm guessing that most folks here are viewing increasing rates as an investment positive. I sure am! Most of us are on the other side of the curve where we're reaping the high rates instead of paying them.

Even non- investor friends are commenting on how suddenly they're seeing nice returns.

Hopefully, the war on savers is over.

 

[pb4uski]

Historical returns

Interesting. The 4% to 6% line is broadly consistent with Vanguard's most recent 10 year outlook which has US aggregate bonds at 4.0%-5.0% and US Treasury bonds at 3.6%-4.6% and US equities at 3.7%-5.7%.

https://advisors.vanguard.com/insights/article/series/market-perspectives#projected-returns

 

[pb4uski]

... And I think what you posted above also confirms that interest rates are but one variable that dictates market moves. They aren't as correlated as most people believe. As to "why" I can only conclude that yes, the market does move for a myriad of reasons. If it was so simple we could probably all day trade successfully.

Bingo. There are a broad myriad of factors that impact stocks. I have some friends who blame or give credit to whoever is President for how the stock market is doing or gas prices and I can't convince them that there are so many factors affecting each of those that whoever is President or whatever party controls Congress is a negligible factor in the whole scheme of things.

 

[Car-Guy]

Fed rate stayed low too long from 2008 to early 2022.

Hopefully, the war on savers is over.

Very true and it "was" very unfair IMO. As someone said earlier on this thread or another, even today's rates don't keep up with inflation, but it certainly takes a lot of the sting out.

 

[FREE866]

Interesting. The 4% to 6% line is broadly consistent with Vanguard's most recent 10 year outlook which has US aggregate bonds at 4.0%-5.0% and US Treasury bonds at 3.6%-4.6% and US equities at 3.7%-5.7%.

https://advisors.vanguard.com/insights/article/series/market-perspectives#projected-returns

When I look across the 4-6% line it looks like historical equity returns are ~7% going out 5 and 10 years.

 

[FREE866]

OK but WHY? What's the mechanisms driving that? It seems counterintuitive.

Just to follow up on the idea of the market being counterintuitive.


I thought this morning would be a disaster in the market given the situation in Israel, oil, talks of escalating war, etc yet looks like we are gonna open down only half a percent. This just reaffirms that I'm clueless about what the market will do day to day, heck even year to year. I find it such an impossible game to play/predict.

 

[Car-Guy]

Just to follow up on the idea of the market being counterintuitive.


I thought this morning would be a disaster in the market given the situation in Israel, oil, talks of escalating war, etc yet looks like we are gonna open down only half a percent. This just reaffirms that I'm clueless about what the market will do day to day, heck even year to year. I find it such an impossible game to play/predict.

You and 99% of the rest of us. Times like this makes me glad I'm 100% in fixed income.