Rising Rates Will Determine When The Stock Market Rally Is Over

seekingalpha2021-03-23

Summary Rising rates have everything to say about the economic cycle and where stocks are heading. In the past, when the yield curve has steepened, it has killed market rallies. That's because it ...

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火星投资狼
2021-03-23
火星投资狼
Comment and like !
- jijimo:
  Like and comment
Sing2me
2021-03-23
Sing2me
Sigh
renwee
2021-03-23
renwee
Bull 🐂
- Sing2me:
  Yeah

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Which shall prevail will ultimately be determined by interest rates. Yes, rates do have a say on which way the market will swing in the weeks ahead, and if they continue to rise, the next major move will likely be lower.\nOn the surface, it would appear that interest rates have no bearing on PE multiples, and that's because they don't. There's no correlation between interest rates and PE ratios. However, there's a strong correlation between the PE's inverse, also known as the earnings yield, and interest rates. Additionally, the yield curve's steepness has a big say in the overall stock market's direction because of the signals that it sends about future economic growth.\nThe only thing the PE ratio and the 10-year yield have in common is that they have nothing in common. In fact, the 10-year yield has done nothing but fall since the early 1980s, and the only time the PE ratio and the yields moved in harmony was the early and mid-2000s when they both happened to be falling at the same time.\n\nIf you turn the PE ratio around, it becomes the earnings yield, and suddenly the relationship becomes much more visible. One can easily see there were only two times the earnings yields, and the 10-year yield didn't travel in the same direction, 2006 to 2008 and 2016 through 2018. From 2006 through 2008, yields began to fall while the earnings yield continue to rise. Then from 2016 to 2018, the 10-year yield rose, while the S&P earnings yield moved sideways.\n\nAdditionally, what seems to matter more is when the spread or the difference between the short end and the long-end of the yield curve is widening that it tends to create problems for the stock market. Since 1990 we have seen a rather large drawdown each time that spread has widened. Right now, that spread is widening. One can't help but wonder if the yield curve's steepening will have the same effect as the previous three periods since 1990.\n\nIt could be that as the yield curve steepens, it's suggestive of higher interest rates, which would suggest that economic growth is likely to slow as those rates rise, indicating slower growth lies ahead. This, in turn, kills inflation expectations sending the 10-year breakeven inflation rate sharply lower.\n\nThat creates big issues for the stock market because inflation expectations and stocks are highly correlated with the year-over-year changes in the S&P 500 and the breakeven inflation moving in similar directions.\n\nTherefore, if rates continue to rise, we could expect over time for the breakeven inflation expectations to begin to fall. When that happens, it will likely send a message that the recent stock market rally has peaked or is near its end. In February of 2000, inflation expectations peaked and began to decline sharply, while also peaking and beginning to decline in July of 2008. There was a smaller example of this in August of 2014, followed by nearly years of a very tight trading range and lots of volatility in the S&P 500 and Nasdaq 100.\n\nThe last time 10-year breakeven inflation rates were this high was in 2014, and while it's still possible for them to climb, the 10-year rate is now rising very quickly. At this pace, it would seem that if rates continue to climb and the curve continues to steepen, it will lead to breakeven inflation expectations breaking down—this likely to result in the equity market repeating the same cycle as in the past. Based on how yields and the market is positioned today, that time may come sooner rather than later.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":353604986,"gmtCreate":1616488389145,"gmtModify":1634525570007,"author":{"id":"3564654698806900","authorId":"3564654698806900","name":"火星投资狼","avatar":"https://static.tigerbbs.com/e07a54590dfa2f7a0c7649fff90653d3","vip":1,"crmLevel":7,"crmLevelSwitch":0,"idStr":"3564654698806900","authorIdStr":"3564654698806900"},"htmlText":"Comment and like !","listText":"Comment and like !","text":"Comment and like !","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/353604986","repostId":1131905307,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3861708,"gmtCreate":1616490568344,"gmtModify":1635750451927,"authorId":3577075923922212,"author":{"id":3577075923922212,"idStr":"3577075923922212","authorId":3577075923922212,"name":"jijimo","avatar":"https://static.tigerbbs.com/22bac6d28b6513739fc962def9c071bd","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":353604986,"type":1,"supId":0,"prevId":0,"content":"Like and comment","text":"Like and comment","html":"Like and comment"}],"langContent":"EN"},{"id":353605722,"gmtCreate":1616488350666,"gmtModify":1634525570128,"author":{"id":"3571448024288156","authorId":"3571448024288156","name":"Sing2me","avatar":"https://static.tigerbbs.com/f485854808e05893440cba75ca2a8b6a","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3571448024288156","authorIdStr":"3571448024288156"},"htmlText":"Sigh","listText":"Sigh","text":"Sigh","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/353605722","repostId":1131905307,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":353602206,"gmtCreate":1616488264005,"gmtModify":1634525571049,"author":{"id":"3571436855465075","authorId":"3571436855465075","name":"renwee","avatar":"https://static.tigerbbs.com/af0cb0f5f1c6705550b899b916598967","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3571436855465075","authorIdStr":"3571436855465075"},"htmlText":"Bull 🐂","listText":"Bull 🐂","text":"Bull 🐂","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/353602206","repostId":1131905307,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":3861432,"gmtCreate":1616488342610,"gmtModify":1635750467364,"authorId":3571448024288156,"author":{"id":3571448024288156,"idStr":"3571448024288156","authorId":3571448024288156,"name":"Sing2me","avatar":"https://static.tigerbbs.com/f485854808e05893440cba75ca2a8b6a","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":353602206,"type":1,"supId":0,"prevId":0,"content":"Yeah","text":"Yeah","html":"Yeah"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":13,"commentSize":3,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1131905307"}