Bogus Myth to Fool Investors Again as Stocks Dip
Oh no! Stocks took a tumble in the US. Should we be panicking?
Well, no — not yet.
A bit of perspective might help here. I’m hearing a familiar argument getting trolled out.
Maybe you’ve already guessed. Rising interest rates could derail stocks!
Hmmm. There’s something familiar about all this…
Let me think. Ah, yes. Just let me check my archives. Back on 23 March, 2017, I wrote about the same thing!
It wasn’t a free article. Otherwise, I would link to the full piece for you.
But obviously a similar meme was going around at the time, because here’s a snippet of what I wrote back then…
‘One fear at the moment is the high price to earnings (P/E) ratio on US stocks. If someone really wants to spook you, they’ll tell you one common ratio is around levels only seen in 1929 and 2007.
‘A second fear is that rising interest rates will derail the stock market. The idea here is that higher borrowing costs can squeeze companies and consumers. That’s the theory, anyway.
‘There’s good evidence to suggest it’s a bogus line of thought in today’s market.’
Since I wrote that last year, the Dow Jones index is up 26%, as of last night’s close.
I can make the same argument now as I did then. The evidence from history suggests stocks can keep rising alongside interest rates…as long as interest rates are coming off a low base.
Here’s a chart on that for you to check out…
Historically, when rates are below 5%, stocks go up. Stocks get into trouble when rates go higher than this.
We can also note that the 10-year US Treasury yield around that time last year was 2.6%.
It’s currently 2.72%.
That’s not to say US stocks — and Aussie ones — can’t dip further from here, or even go into a full bear market.
That would most likely come from some other factor, or range of them.
But I don’t expect that to happen, over the full year. Rising interest rates are a healthy sign for the economy. Growth is picking up!
After all, it was only a few years ago that the mainstream worried we were in a ‘secular stagnation’. The forecast — and worry — was that interest rates could go to zero…even negative!
Hey, I’m confused. Everyone was worried when interest rates were going down, and now they’re worried that they’re going up.
When will they be happy?
Probably never. One problem is that the mainstream media repeatedly asserts that ‘low’ interest rates stimulate the economy and ‘high’ interest rates cool it off.
There’s no empirical evidence for this, despite everyone taking it for granted.
Unfortunately, if you take your cue from the mainstream and the powers that be, you’ll often find that things just don’t add up.
The Dow is still strongly up from where it was at the start of the year. It’s going to take more than what we saw overnight to shake out investors.
I believe any reasonable dip will be bought up. However, I could be wrong. I’ll find out pretty fast!
A lot of US stocks are due to report their last quarterly earnings. That will provide a better picture of what’s happening than the daily news feeds.
I’ve been making the case that stocks will keeping coasting higher, especially as cryptos and blockchain send more speculation into the market.
The Aussie market will follow the lead of the US.
The Wall Street Journal reported a few days ago that three of America’s largest discount brokerages are seeing surges in client activity.
This is especially from retail investors — many of them millennials ‘lured by the boom in cryptocurrencies and cannabis investments’.
This is exactly what we need to see to send stocks up. In fact, it’s classic Dow theory playing out right now.
The idea here is that a bull market moves in three key stages. The final stage — where we seem to be heading — is when stocks rise regardless of value and financial metrics, as everyone piles in to get in on the ‘easy’ gains.
This is when stories of day traders and the like begin to proliferate.
We also have to watch the bond market here, too. If money starts to come out of here, spooked by rising rates (a very real threat to bondholders) or a weak US dollar, it might find a home in stocks too.
Like I keep saying, short-term swings aside, we’re more likely to see a ‘melt-up’ than a meltdown.
Editor, The Daily Reckoning Australia