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Can a slightly rising interest rate environment and a equities bull market co-exist?

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  • Feb 13th, 2018 10:07 pm
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Can a slightly rising interest rate environment and a equities bull market co-exist?

It seems from media it's could, should, would but will it? Why or why not? Of course some equity valuations do make use of interest rates in the denominator.

How Spiking Bond Yields Could Topple a Stock Market Rally
https://www.bloomberg.com/news/articles ... rket-rally

Will Rising Rates Kill the Bull Market?
Long-term secular forces will likely keep interest rates low and be supportive of equities.
https://www.oppenheimerfunds.com/adviso ... ull-market

Is This the End of Low Interest Rates?
http://www.morningstar.co.uk/uk/news/16 ... rates.aspx
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alanbrenton wrote:
Feb 12th, 2018 12:50 pm
It seems from media it's could, should, would but will it? Why or why not? Of course some equity valuations do make use of interest rates in the denominator.

How Spiking Bond Yields Could Topple a Stock Market Rally
https://www.bloomberg.com/news/articles ... rket-rally

Will Rising Rates Kill the Bull Market?
Long-term secular forces will likely keep interest rates low and be supportive of equities.
https://www.oppenheimerfunds.com/adviso ... ull-market

Is This the End of Low Interest Rates?
http://www.morningstar.co.uk/uk/news/16 ... rates.aspx
1. It will or it will not. Will and when it will be - nobody knows.
2. They used to co-exist in the past at one point and be negatively correlated at some other point. But as everybody knows, past could not be used as a future prediction. Thus, see #1 :)
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You didn't talk about how long interest rates are even with the 100 bps run up in the US Treasuries. :)

I think it's unprecedented.
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alanbrenton wrote:
Feb 12th, 2018 1:53 pm
You didn't talk about how long interest rates are even with the 100 bps run up in the US Treasuries. :)

I think it's unprecedented.
Why would it matter? Interest rate movements are not the determining factor of stocks, but rather the reaction to the overall economy. If the markets and economy seem to be doing well and enough money is flowing around, the central bank reacts by increasing interest rates. Sure, people speculate and fear based on what might occur, but so does the central bank. If we had gone into a downturn based on the fear alone, the central bank would likely pause on interest rate increases.

So when it comes down to it, the whole exercise of deciding what effect this does is futile because they are dependent on each other. In other words, this question is really a waste of time because you really don't know. @asa1973's answer is a good one because we really don't know what will happen.
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xgbsSS wrote:
Feb 12th, 2018 6:35 pm
Why would it matter? Interest rate movements are not the determining factor of stocks, but rather the reaction to the overall economy. If the markets and economy seem to be doing well and enough money is flowing around, the central bank reacts by increasing interest rates. Sure, people speculate and fear based on what might occur, but so does the central bank. If we had gone into a downturn based on the fear alone, the central bank would likely pause on interest rate increases.

So when it comes down to it, the whole exercise of deciding what effect this does is futile because they are dependent on each other. In other words, this question is really a waste of time because you really don't know. @asa1973's answer is a good one because we really don't know what will happen.
So why did interest rates go up so fast in the past four months instead of being priced in gradually?

Saying we don't know is just a lame excuse IMHO.

Interest rates, just like Trump's tax policies, do affect stocks. There was an article about how company valuation will have to be tweaked as a result of tax changes. For stocks, it is the risk free premium over US treasuries, so you can't suggest interest rates don't matter in Investors' asset allocations.

Interest rates can affect stocks and vice versa as can be noted from the subprime crisis. It is not always one before the other. Stocks tanking can get government attention. To deny that is pure silliness.

You didn't even answer my simple question in the thread title.
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alanbrenton wrote:
Feb 12th, 2018 6:45 pm
So why did interest rates go up so fast in the past four months instead of being priced in gradually?

Saying we don't know is just a lame excuse IMHO.

Interest rates can affect stocks and vice versa as can be noted from the subprime crisis. It is not always one before the other. Stocks tanking can get government attention. To deny that is silly.
Because easing was being stopped by many central banks with increased economic activity so therefore bonds weren't being purchased. Inflation started creeping up due to the increased economic activity and increased wages. People got scared because easy money may no longer be available and the debts that they carry are going to cost more.

Our answers are not silly because you are trying to fit one parameter (increasing interest rates) to one outcome (markets movement) which really isnt a cause and effect relationship. The real relationship is the economy and how interest rates and markets are affected by it. Interest rates and markets are the response to the state of the economy.

You are really asking a futile question. The conditions to which the interest rate will affect the market will never be the same. Mid 2000s, rates were creeping upward due to improving fundamentals and markets responded at hand. Markets tanked due to a bubble in housing, not interest rates. Now we are in a market where interest rates are creeping up again. Markets had a small blip (if you can even call it that) which is a different reaction to mid 2000s.

Call my response lame if you must, but generalizing the movement of interest rates to how markets react is frankly a waste of time as it ignores the underlying factor, which is the economy at large.
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xgbsSS wrote:
Feb 12th, 2018 7:07 pm
Because easing was being stopped by many central banks with increased economic activity so therefore bonds weren't being purchased. Inflation started creeping up due to the increased economic activity and increased wages. People got scared because easy money may no longer be available and the debts that they carry are going to cost more.

Our answers are not silly because you are trying to fit one parameter (increasing interest rates) to one outcome (markets movement) which really isnt a cause and effect relationship. The real relationship is the economy and how interest rates and markets are affected by it. Interest rates and markets are the response to the state of the economy.

You are really asking a futile question. The conditions to which the interest rate will affect the market will never be the same. Mid 2000s, rates were creeping upward due to improving fundamentals and markets responded at hand. Markets tanked due to a bubble in housing, not interest rates. Now we are in a market where interest rates are creeping up again. Markets had a small blip (if you can even call it that) which is a different reaction to mid 2000s.

Call my response lame if you must, but generalizing the movement of interest rates to how markets react is frankly a waste of time as it ignores the underlying factor, which is the economy at large.
My question isn't futile. If they can co-exist, then it makes sense to have a heavier equity weighting.

Especially if you say interest rate will always trail inflation or growth rates.

Interest rates are still at historic lows if you take periods spanning decades.
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alanbrenton wrote:
Feb 12th, 2018 7:35 pm
My question isn't futile. If they can co-exist, then it makes sense to have a heavier equity weighting.

Especially if you say interest rate will always trail inflation or growth rates.

Interest rates are still at historic lows if you take periods spanning decades.
I never said interest rates will always trail inflation. They can respond to each other, but are also not exclusive to each other.

What I am pretty much saying though is that they have pretty much nothing to do with each other. They are both a response to the economy,

Central banks generally tend to respond to markets, but to be honest, they aren't the main driver of interest rates either. Even before they made their rises, you see bond yields move with economic fundamentals, irregardless of whether the central bank changed the overnight rate.

What makes a investor decide to have a heavy equity portfolio has nothing to do with where interest rates will go. You would decide that based on economic fundamentals. If you are a passive investor, you wouldn't care anyway. Investors that invest in individual shares look at the health of an individual company and their respective business. Interest rates hardly factor unless you are leveraging
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xgbsSS wrote:
Feb 12th, 2018 7:42 pm
I never said interest rates will always trail inflation. They can respond to each other, but are also not exclusive to each other.

What I am pretty much saying though is that they have pretty much nothing to do with each other. They are both a response to the economy,

Central banks generally tend to respond to markets, but to be honest, they aren't the main driver of interest rates either. Even before they made their rises, you see bond yields move with economic fundamentals, irregardless of whether the central bank changed the overnight rate.

What makes a investor decide to have a heavy equity portfolio has nothing to do with where interest rates will go. You would decide that based on economic fundamentals. If you are a passive investor, you wouldn't care anyway. Investors that invest in individual shares look at the health of an individual company and their respective business. Interest rates hardly factor unless you are leveraging
One decade of ultra low interest rates and global equities at historical high yet you insist interest rates have little to do with equity valuations.

Okay. Fair enough.
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alanbrenton wrote:
Feb 12th, 2018 7:50 pm
One decade of ultra low interest rates and global equities at historical high yet you insist interest rates have little to do with equity valuations.

Okay. Fair enough.
Yup pretty much. The bigger factor is the debt load that individuals carry, not the interest rate they pay. How the markets will respond will be based on economic fundamentals continuing out of here. Market interest rates will move in tandem and central bankers will see where things go.

If people are scared about higher interest costs, you will see greater pay down of debt. This will reduce consumer demand and inflation will then be kept at bay. This will then make central bankers hold. If consumers don't respond and aren't scared, and continue to spend, then central bankers will note higher inflation and are more likely to respond. Do you see where we're going? the interest rate doesn't change with how the markets are doing, but rather the fundamentals of the economy.

You are focusing on the wrong factors.
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xgbsSS wrote:
Feb 12th, 2018 7:57 pm
Yup pretty much. The bigger factor is the debt load that individuals carry, not the interest rate they pay. How the markets will respond will be based on economic fundamentals continuing out of here. Market interest rates will move in tandem and central bankers will see where things go.

If people are scared about higher interest costs, you will see greater pay down of debt. This will reduce consumer demand and inflation will then be kept at bay. This will then make central bankers hold. If consumers don't respond and aren't scared, and continue to spend, then central bankers will note higher inflation and are more likely to respond. Do you see where we're going? the interest rate doesn't change with how the markets are doing, but rather the fundamentals of the economy.

You are focusing on the wrong factors.
Inflation has been kept at bay yet CB's have been raising rates. So there is a disconnect or are you going to suggestion normalization / reduction of QE?

I agree with you that interest rates are tied to fundamentals of the economy, much like how the economy can be tied to interest rates (check the past few mild to moderate recessions and they most likely happened when interest rates were closer to their economic cycle high), but we don't make money off the economy but rather specific asset classes.
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alanbrenton wrote:
Feb 12th, 2018 8:13 pm
Inflation has been kept at bay yet CB's have been raising rates. So there is a disconnect or are you going to suggestion normalization / reduction of QE?
Central Bank's main focus is on controlling inflation. The market's interest rate though isn't necessarily squarely the result of what the central bank sets it at. It is a force and can help direct where it will go, but ultimately it is the market's decision to set it. Just like how the government of Venezuela says the Bolivar is worth so much in US$, but the black market says otherwise. Ok probably not that extreme, but central banks are really not the deciding factor of interest rates either.
alanbrenton wrote:
Feb 12th, 2018 8:13 pm
I agree with you that interest rates are tied to fundamentals of the economy, much like how the economy can be tied to interest rates (check the past few mild to moderate recessions and they most likely happened when interest rates were closer to their economic cycle high), but we don't make money off the economy but rather specific asset classes.
Then why are you trying to tie the two together (interest rates and the direction of markets)? You were the one who asked whether interest rates increasing and the bull market can co-exist. What we have responded with is that they are not the things affecting each other and really, we don't really know because how markets will react will be ultimately determined by how the economy progresses from here.

If you were talking about interest rates increasing in our current situation of high debt leverage, strong economic growth numbers, low unemployment, etc.etc. that is a different conversation and there would be more to discuss because this actually includes parameters of the economy that is pertinent.

But the thing to make clear is that interest rates and markets cannot be determining factors on their own.
Last edited by xgbsSS on Feb 12th, 2018 8:44 pm, edited 1 time in total.
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xgbsSS wrote:
Feb 12th, 2018 8:44 pm
Central Bank's main focus is on controlling inflation. The market's interest rate though isn't necessarily squarely the result of what the central bank sets it at. It is a force and can help direct where it will go, but ultimately it is the market's decision to set it. Just like how the government of Venezuela says the Bolivar is worth so much in US$, but the black market says otherwise. Ok probably not that extreme, but central banks are really not the deciding factor of interest rates either.



Then why are you trying to tie the two together (interest rates and the direction of markets)? You were the one who asked whether interest rates increasing and the bull market can co-exist. What we have responded with is that they are not the things affecting each other and really, we don't really know. If you were talking about interest rates increasing in our current situation of high debt leverage, strong economic growth numbers, low unemployment, that is a different conversation.

But the thing to make clear is that interest rates and markets cannot be determining factors on their own.
There's the bank lending rates and government bonds. One controlled, the other one less so.

So if inflation is in check, why raise lending rates?
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alanbrenton wrote:
Feb 12th, 2018 8:46 pm
There's the bank lending rates and government bonds. One controlled, the other one less so.

So if inflation is in check, why raise lending rates?
How about the market place AKA as mortgage rates set by banks, people's utilization of credit cards etc. Remember, banks didn't pass down interest rate cuts as much as they wanted to reduce overall risk (Prime rate only went down 15bps vs 25bps the central bank did). There are other interest rates set by market participants that determine the availability of money in the economy. in fact, the overnight rate is only one random rate out of everything factoring into the overall economy. The only reason why the central bank has control is because they indeed have enough clout to do so. Looking at central banks in Venezuela, and Zimbabwe etc., they do not have enough. So no, even if the central bank sets a rate, it's ultimately the market that determines them.

Inflation also was starting to creep up too so the central bank did raise rates to help to mitigate this rise. So no, it wasn't in check as you put it.
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