Every market analysis that I read discusses the deleterious pangs that higher interest rates are due to impose on equity holders. The over-arching sentiment is one that bodes poorly for both bond and stock holders. I never quite understood the need for forced interest rate hikes, controlled by an unelected board of people who rule over America’s middle class like a monarchy. Who the fuck does the Federal Reserve think they are? They can unilaterally toss America’s entire economy into a tailspin with just one rogue statement — cause the deaths of millions with policies that break the fabric of commerce.
Here is the 10yr bond that everyone is freaking out over. Once it surpasses 3%, the world is going to end.
This from the absolute faggots at Merrill Lynch, America’s most prolific boiler room operation.
“You’re on the cusp of leaving the sweet spot, but that being said, the rising rates are not necessarily bad for the stock market. Yes, from your finance courses, a higher discount rate means you’re going to see lower valuations, all else being equal. But the ‘all else being equal’ missing ingredient is a high growth rate,” said Marc Pouey, equity and quant strategist at BofAML.
Pouey said the “sweet spot” for stocks is a 10-year yield between 2 and 3 percent, but the fact that not only U.S. growth but global economic growth is strong makes it more likely that stocks will be able to positively navigate a zone where the 10-year is above 3 percent.
“There is no magic number. You have periods of positive correlations and periods of negative correlations,” Pouey said.
Treasury strategists say the 10-year could make a quick run toward 3 percent and could do that as more information comes out from the Fed. The Fed did not tip its hand, in the January meeting’s minutes, as to whether it would raise rates more than the three times forecast. But some Fed watchers viewed the comments in the minutes as being more confident about the path they are on. After its March meeting, the Fed will release new projections for rate hikes and the economy.
“Now the yield trend is intact. The new high is important,” said Chris Rupkey, chief financial economist at MUFG Union Bank. “It looks like 3 percent is the next stop. … I think [stocks] can get used to this at some point. They certainly didn’t like it today. … I think it’s important for stocks to see how many times [the Fed] will go this year. They signaled yes they are going in March. It’s still up in the air how many times they will go this year.”
As for the market freak out because MUH higher rates.
As for rising rates, Pouey studied 15 periods of rising 10-year yields since 1954 and found stocks generated positive returns 90 percent of the time. “I think what’s interesting in this bull market is the best year for stocks was 2013, when you saw the ‘taper tantrum,’ 100 basis points higher in yield,” he said. The S&P was up more than 29 percent that year.
BofAML said over the past 64 years, the correlation has ranged from negative 63 percent to positive 75 percent. The relationship tended to be negative in some of the 1960s through the 1990s, with rising yields being negative for stocks. The average level of rates then was 7.5 percent.
But in this century, the correlation was more often positive and the average level of rates was 3 percent. The relationship with rates and stock returns peaked about five years ago, but has stayed positive and has been trending higher since the trough of 13 percent in 2015.
Rising rates could hurt corporate margins, but the impact should be gradual since large-cap debt is mostly long term and fixed rate, BofAML said.
“Inflation is probably more important, and the sweet spot is 1 to 3 percent,” Pouey said. The most recent reading was January’s headline CPI at 2.1 percent annualized.
That’s right. The last time rates rose was in 2013, due to the ‘taper tantrum.’ That was the last year stocks were any good under Communist Obama. Remember all of the good times we had back then, playing the game, getting rich?
Bottom line: inflation is a fiction. Rates will not go up too much more, unless the rigged CPI shows inflation greater than 2.3%. After this phase of consolidation passes, expect stocks to break the fuck out to the upside again — just in time for St. Patrick’s Day.
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