When the Federal Reserve cut interest rates to a negative real yield, literally paying speculators to borrow money, the price of all assets (stocks, bonds, real estate, crypto, etc.) rose in lock step.
Why is anyone surprised that rising interest rates are causing the bloated prices to fall together?
by Hardika Singh, The Wall Street Journal, 10/12/2022
Shares of everything from technology giants to household-goods companies and utility providers have been trading in lockstep over the past month, a potentially worrying sign to investors trying to navigate a turbulent market.
The S&P 500’s one-month realized correlation — a measure of how stocks in the benchmark index have moved in relation to one another over the past 30 days — climbed to 65.3% on Sept. 13, according to Susquehanna International Group…A correlation of 100% means stocks are all moving together, while a correlation of zero means their moves aren’t related at all. [A chart shows that the correlation in 2021 averaged about 25%.]…
The tandem moves extend well beyond stocks. Government bonds, which are considered a haven during times of financial turmoil, have slipped alongside stocks for three consecutive quarters for the first time since 1974…Gold, another haven, has fallen 8.1%…[end quote]
Housing prices are also beginning to drop. The huge bubble will deflate as mortgage rates have doubled in the past year.
The fed funds rate, which is 3.25% with a prediction to rise to 4.5% by early 2023, is still well below the inflation rate so the real rate is strongly negative. Even if inflation declines to the Fed’s targeted 2% the fed funds rate of 4.5% would still be the average historic real rate of 2.5%. It wouldn’t be too high by historic standards. Despite investors’ screams, the Fed would be reasonable to maintain it at that level for the long term. And that’s assuming that inflation really does fall to 2%, which probably won’t happen until 2024, if ever.
The markets are still hoping that the Fed will quickly drop the fed funds rate to the emergency 0% level they maintained for so long.
Maybe they are right. Or maybe the Fed will finally realize the many harms caused by ZIRP, described in the book “The Price of Time.”
For the short term, the Fed will be raising rates and all asset prices will slide in lock step as they rose in lock step.