We have received many questions as to whether the increase in interest rates is bad for stocks. There is a lot of noise in the media as rising interest rates, the stock market is toasted. This is not true!
We understand how confusing it is because we live in a global economy and in most countries there is little or no economic growth. It was so bad that in many countries, investors were willing to buy bonds to pay negative returns. The only reason to buy a bond that will cost every year to keep it, is that you believe we are in a deflationary environment, and that the rates would go even lower.
But in the United States, the economy is growing. With a gross domestic product (GDP) increasing by about 2%, with a jump to 3.2% in the third quarter. So now the Federal Reserve will raise its rate for the first time in a year, and only the second time since June 2006.
GDP growth is a positive sign that inflation is rising slowly. With economic growth and improved employment in the US, rates will rise. A growing economy, with wage growth are positive signs. This means that consumers are buying more, companies hire more people, and wages are rising. These are not bad news for the stock market.
We have been flooded over the past few years with talking heads all saying good news is bad news, and bad news is good news. When the economy slowed, the Fed began to cut rates and heads talking cheer, believing that lower rates would save the economy. We were told that low rates mean that everyone would borrow and spend. When, in fact, all the low rates obtained were the elderly incapacitated who depended on the restitution of their economies, and led to most pension schemes at a stage where they are now dangerously underfunded, due to the low Yields.
The current scenario of rising rates is not bad for stocks, it is good. If we look at the history, in general, the yield (interest) on the US 10-year benchmark and the S & P 500 move in the same direction. This makes sense, as economic growth, companies must do better, so that stock prices should increase. As for bonds, as it increases the value of the shares, investors take their shares and bonds capital.
Over the past two years, we have seen the S & P 500 and yields move in the opposite direction. This is explained by the massive QE central banks in Europe and Japan. Both central banks increased bond purchases, maintaining the rates in these regions, to the point that many of these countries had negative bond yields.
This crazy experience with negative obligations motivated Europeans and Japanese (as well as Chinese, Russian and many others) to move their capital from their domestic and US markets. The world capital began to flow into US bonds, because they were paying much higher yields, but also entered into US stocks and real estate.
This is an excellent example of why subscribers are still trying to understand the overall flow of capital. While central banks boosted European markets and Japanese bonds (meaning lower yields), the US central bank stopped its QE bonds program in October 2014. Thus, in the United States, The foreign capital of which US boosted the bond yields below) and boost aid prices for US equities.
Recently, there were over $ 13 billion invested in bonds overall negative performance. As economic news continued to improve in the US, more capital began to emerge from the global bond and equity markets in the United States. So now, with inflation more slowly, we are seeing shares and yields rising together (decreasing bonds).
Note that when the Fed announces its rate hike in December, is likely to see the brief action of how to talk heads again consider these bad news. But after this initial setback, while the economy continues to improve, it should be good for stocks.
We understand how confusing it is because we live in a global economy and in most countries there is little or no economic growth. It was so bad that in many countries, investors were willing to buy bonds to pay negative returns. The only reason to buy a bond that will cost every year to keep it, is that you believe we are in a deflationary environment, and that the rates would go even lower.
But in the United States, the economy is growing. With a gross domestic product (GDP) increasing by about 2%, with a jump to 3.2% in the third quarter. So now the Federal Reserve will raise its rate for the first time in a year, and only the second time since June 2006.
GDP growth is a positive sign that inflation is rising slowly. With economic growth and improved employment in the US, rates will rise. A growing economy, with wage growth are positive signs. This means that consumers are buying more, companies hire more people, and wages are rising. These are not bad news for the stock market.
We have been flooded over the past few years with talking heads all saying good news is bad news, and bad news is good news. When the economy slowed, the Fed began to cut rates and heads talking cheer, believing that lower rates would save the economy. We were told that low rates mean that everyone would borrow and spend. When, in fact, all the low rates obtained were the elderly incapacitated who depended on the restitution of their economies, and led to most pension schemes at a stage where they are now dangerously underfunded, due to the low Yields.
The current scenario of rising rates is not bad for stocks, it is good. If we look at the history, in general, the yield (interest) on the US 10-year benchmark and the S & P 500 move in the same direction. This makes sense, as economic growth, companies must do better, so that stock prices should increase. As for bonds, as it increases the value of the shares, investors take their shares and bonds capital.
Over the past two years, we have seen the S & P 500 and yields move in the opposite direction. This is explained by the massive QE central banks in Europe and Japan. Both central banks increased bond purchases, maintaining the rates in these regions, to the point that many of these countries had negative bond yields.
This crazy experience with negative obligations motivated Europeans and Japanese (as well as Chinese, Russian and many others) to move their capital from their domestic and US markets. The world capital began to flow into US bonds, because they were paying much higher yields, but also entered into US stocks and real estate.
This is an excellent example of why subscribers are still trying to understand the overall flow of capital. While central banks boosted European markets and Japanese bonds (meaning lower yields), the US central bank stopped its QE bonds program in October 2014. Thus, in the United States, The foreign capital of which US boosted the bond yields below) and boost aid prices for US equities.
Recently, there were over $ 13 billion invested in bonds overall negative performance. As economic news continued to improve in the US, more capital began to emerge from the global bond and equity markets in the United States. So now, with inflation more slowly, we are seeing shares and yields rising together (decreasing bonds).
Note that when the Fed announces its rate hike in December, is likely to see the brief action of how to talk heads again consider these bad news. But after this initial setback, while the economy continues to improve, it should be good for stocks.
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