Apologies I have been away for a while (a welcome change to most here, I am sure). But in my cursory glance, I did not see this topic discussed explicitly.
Is there any doubt at all now, that the stock market multiple is strongly (negatively) correlated with interest rates? The tech high fliers that are crashing now, are by and large not highly in debt. The value stocks that are holding on their own, are, and can expect to pay much higher interest costs as they roll their debt. So why has VTV (a value ETF) outperformed VUG (a growth ETF) so handily in the last six months?
Because value stocks have an earnings yield that is competitive with higher fixed income interest rates, growth stocks do not.
When you got 2% for 30 years it may have made sense to take a flier on unproven growth, out of sheer desperation. When you can get 5% instead, the bord in the hand looks pretty plump.
Some here don’t think nominal rates have an effect on attractiveness of stocks. The market (and WEB) seem to differ.
8 Likes
Is there any doubt at all now, that the stock market multiple is strongly (negatively) correlated with interest rates?
…
Some here don’t think nominal rates have an effect on attractiveness of stocks. The market (and WEB) seem to differ.
Was there ever any doubt that current interest rates tend to affect stock prices?
The key point that I among others have made is that the interest rates affect the current prices of equities, but not their values.
The forward return from equities is definitely a function of how expensive the equities were when you bought them,
and definitely not a function of the prevailing interest rate when you bought them.
A company will produce only a certain amount of profit in the next 10-20-30 years.
The current price of lending in another market doesn’t change that.
If the future profit stream doesn’t change, the value doesn’t change.
Equity prices might change for a while when interest rates rise–that’s what usually happens.
That doesn’t mean they’re worth any less.
A favourite quote of mine from the paper “Fight the Fed Model”.
'In fact, 1999-2000 is a nice example of the difference between describing how P/Es are set versus justifying them.
When the fitted series peaked in the 40s in 1999, it was not saying that this P/E is rational for the S&P 500 (it was not).
It was saying that, "assuming investors act the way they have in the past, and given how low equity volatility had been
versus bond volatility, and how low interest rates were, such an irrationally high P/E was to be expected!"
The Fed Model… offered no true solace to a long-term investor buying the S&P at a P/E of 44. But, it did explain
why he might be tricked into doing so…’
https://www.aqr.com/Insights/Research/Journal-Article/Fight-…
Jim
PS
This presumes we’re talking about current nominal bond rates that are usually being talked about,
not changes in future long run average real corporate borrowing costs, which is not the same thing.
For example, real borrowing costs have been falling, not rising, lately: inflation has risen more than nominal interest rates have.
The long run average real cost of corporate borrowing does of course affect the value of equities, much as the long run real cost of diesel or electricity would.
But the value change from rising real borrowing costs is pretty modest, especially for most healthy firms.
This is not the same as the discussion about competing assets becoming more attractive and causing equity prices to gyrate.
20 Likes