US Stocks Add To Losses On Worries About Interest Rates

Fuel on fire

US Stocks Add To Losses On Worries About Interest Rates

Rising bond yields do not always lead to poor equity performance. We haven't had inflation, and now we have it and everyone freaks out.

The stock market is still up dramatically since President Trump's election.

Treasurys are surging as stocks come under pressure. Here are some thoughts on why that can be bad for equities.

Analysts are attributing this fall to rising global bond yields, which have unsettled investors and central banks the world over. The S&P 500's annual profits are now about 4.3 per cent of the index's price.

New York's Dow Jones Industrial Average plunged more than two percent after the release of a healthy January jobs report that showed the biggest increase in wages in nine years.

Another way of thinking of this is to consider valuation multiples for each security. That compares with 22.6 times profits for the S&P 500. Rates Rising Bob Michele, global head of fixed income for JPMorgan Chase, says that the "lower for longer" story is changing.

Again, the comparison, a version of something known as the Fed model, isn't unanimously embraced by professionals. "Now, they're moving higher and investors are concerned they might move higher faster".

"The simplest way to look at it is, everything is relative". Core inflation, which is growing at less than 1%, would need to rise substantially for bond prices to see a more meaningful increase.

A related concept is net present value.

As rates climb, consumers will end up paying higher interest on their credit cards, mortgages and auto loans.

"This is the beginning of more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria", said Jonathan Garner, a global emerging market strategist at Morgan Stanley.

Stocks closed lower Wednesday, but not before swinging wildly to sharply higher and lower levels, as interest rates rose. "The links are always tenuous and squishy at best".

India, too, is witnessing a rise in yields on 10-year bonds, and the Dalal Street is feeling the heat.

Oil prices fell to their lowest in seven weeks amid fears of rising global supplies after Iran announced plans to increase production and US crude output hit record highs. It has raised the benchmark fed funds rate five times since December 2015, to a range between 1.25%-1.5%, having left them at zero for seven years.

Monday's historic slump in U.S. stocks had something to do with this. "Almost 50% of companies within the S&P 500 have reported results, with around 80% of those beating revenue expectations, which is the highest percentage since at least the third quarter of 2008".

"Equity nervousness seems to be about repricing for higher yields and tighter Fed policy". "There is an emerging inflation story in the U.S. - and rising USA inflation makes monetary policy less predictable".

"I don't think this is a "one-day" that finishes today", he added.

Jim O'Neill, Former Commerce Secretary in the United Kingdom government, on Monday said the U.S. is growing and the central bank may need to tighten monetary policy faster than the market has perceived. For Hogan, the 10-year yield's recent break through 2.63 percent, its 2017 high, signaled the inevitable move to 3 percent. In fact, the 10-year Treasury yield is up about 40% from September, when it was hovering around 2%. In this case, it is the difference between returns offered by equity and that by bonds. A bull run that lasted more than three decades in the bond market might finally be over.

Theoretically, when bond yield rises, the opportunity cost of investing in other assets, including equities, rises. The firm manages US$179 billion. "There is no doubt interest rates will rise and liquidity will be withdrawn but it will be gradual and calibrated in nature", said Shah of Kotak Mutual Fund.

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