Oct 9, 2014
Why are equity markets at their current level?
Why is the equity market still at relatively high levels despite the Fed's QE programme coming to an end and the impending rates hike?
I remember reading just a few months ago about how the Fed's monetary policy programmes were the main factor supporting the equity markets and yet, they have not really seen much of a decrease.
Any reasons?
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Comments (11)
They are kind of in a yo-yo right now rather.
Like everything everywhere at every time, because that's what people are willing to pay at that point in time.
Rate hikes are not a credible threat, and the market knows this. QE4 should be coming soon.
What is love? What is this longing in our hearts for togetherness? Is not love not unlike the unlikely not it is unlikened to?
This to all my hatin' folks seeing me getting guac right now..
we're about 5% down from peak, which is a minor hiccup, not a correction or really anything of substance. I still believe that markets are where they are because of the fed-driven relative value trade. people see little return in bonds (low interest rates) and so the ERP doesn't have to be very high (high PE = low earnings yield = narrower ERP) for people to want to go to stocks and continue to buy them up. also M&A activity, improving employment numbers (very high job openings & quits numbers here in the US), as well as accommodating monetary policy are all reasons why the market is up right now. is it justified? depends on what camp you're in. for our clients, we're still invested in US over international & EM, but we took profits before the recent spat of volatility beginning in September and put it elsewhere, sort of as dry powder if this goes down 10%+.
people don't seem to realize that it's highly unlikely (though not impossible) that when rates rise, they don't rise tremendously. today, the 10y is at 2.3, which is low. we came into the year with it at 2.86, and I'd argue it's been declining because of global demand given lower yields in other countries' sovereign bonds (see Germany & Japan's 10y yields, and make sure you're sitting down), as well as various geopolitical events and China depressing its currency.
in a word, people are uncertain. they always are, they always will be, and they make decisions with their money because of their uncertainty. no one is certain if Europe will break up or if the Euro will survive, no one is certain that employment will keep improving, no one is certain that things will be bad, so they increase exposure to risk assets.
to OP, instead of wondering why the market is doing what it's doing, do your best to buy quality assets at discounts from intrinsic value. regardless of what the market "should" be doing, Mr. Market will not abide.
Thanks for all your insights. what do you anticipate will happen once rates start rising? I've read that it could go either way - stocks could fall as the discount rate increases (is this correct) or stocks could be mostly unchanged as the interest rates increase is accompanied by strong economic data.
The latter is more likely this time because the Fed won't meaningfully raise rates until economic data is strong.
I'm with Dick here. what we're doing specifically is owning individual names rather than SPY or some large cap fund with low active share so we'll react a little different than the market as a whole. logically, if rates rise the multiple should come back so the avg earnings yield gives you a premium over us10, but it could also go sideways, or it could go up further still if the bullishness from strong economic data outweighs the relative value trade of people getting out of stocks to buy bonds.
another thing to keep in mind is that on a nominal basis, stocks & bonds don't do terribly in a rising rate environment. people keep citing the 70s but a large part of that was real returns because inflation was double digits. between 1940 and 1980 (rising rates) there were only 7 negative years for bonds and 14 negative years for stocks (DJIA, S&P wasn't around until the late 50s) on a nominal basis. if inflation doesn't skyrocket and rates move up slowly, I don't see much reason for worry for long term investors.
That's 'cause stocks are cheap. I am a buyer here.
You would do far better trying to understand a basket of 5-10 stocks than you will trying to understand the entire market.
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