Investing

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

  • Last Updated:
  • Feb 13th, 2018 10:07 pm
[OP]
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Apr 21, 2004
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rodbarc wrote:
Feb 12th, 2018 9:49 pm
Yes, they can co-exist, I wrote about this very topic a month ago on this thread.


Rod
Thanks Rod. Bull market still have lots of legs left. :)
[OP]
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Apr 21, 2004
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Just about everything can affect anything. It is the writer's opinion but it makes sense that everything, including interest rates, are intricately intertwined.

Stocks may drag down the economy, not the other way around
"It was not the economy that dragged down equities in 2000, it was the market moving first and dragging down the economy."

http://business.financialpost.com/investing/selloff
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Oct 6, 2015
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The TSX historically does well in a rising rate environment. In the 60s and 70s the TSX (TSE at the time) absolutely spanked the Dow/S&P500.

The Dow/S&P500 does well in a falling rate environment. The Dow/S&P500 has solidly outperformed 1980-2017 (with an interlude of underperformance 2002-2008), coincident with the falling long-term interest rates.

So its just a matter of the type of equities someone buys, or the nationality of the 'equities bull market'.

The TSX-index firms tend to:

a) Be in sectors which are benefit from higher inflation rates.

b) Are financed with long-term debt, as opposed to short-term financing heavily seen in US firms (ie: GE notoriously financed much of its balance sheet in the commercial paper market and imploded in 2008 as the result of short term funding being unavailable!).

c) Be less sensitive to 'consumer' spending as few TSX-listed firms by market capitalization are consumer-facing and more sensitive to capital spending.

d) Invest more heavily in long-term infrastructure for which the availability of capital provides a sort of 'moat' around competitive expansion.

So to answer the question specifically, I believe that the TSX will experience a bull market in a rising long-term interest rate environment, while the Dow/S&P500 will experience a bear market.

To put things into perspective, TSE = 2000 in 1980, Dow = 1000. Today its nearly the opposite, TSX = 15,000, Dow = 25,000. If you assume the relationship is cyclical over the long term, the TSE/TSX has a long ways to catch up, while the Dow will probably stagnate as it did in the 60s and 70s.

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