Sunday, June 7, 2015

Stock Market: Ignore The Interest Rates Rise

(Drivebycuriosity) - Last week the US stock market showed again how stupid he can be. On Friday we learned that the US economy is gaining strength and has recovered from the winter break; but the the US stock markets (S&P 500 and Dow Jones) closed in the red.

If we believe Reuters and other media, Friday´s "good news" (280,00 new US jobs in May and an accelerating average wage growth) are "bad news" for the stock market because a stronger jobmarket raises the possibility that the Fed will hike her interest rates in autumn (reuters). In the recent days the interest rates on the bond markets (mid to long term interest rates) have been already climbing.

I think we are seeing just a normalization. Interest rates have been ridiculous low - close to zero and in some areas below zero. This fits to an economic apocalypse but not to an economy which is gaining strength, albeit slowly. Interest rates have to go up, but not much because there is no inflation and we are far away from an overheating economy.

I believe moderately rising interest rates won´t end the bull market for stocks. Apparently the stock sellers follow this calculatio: Stock prices (value of the company) reflect the sum of the expected company profits, discounted with the interest rate. Higher interest rates imply a bigger discount. Everything equal this translates into a lesser value of the stock.

                                                    The Complete Calculation

But we live in a world where nothing stays equal. Friday´s job market news imply that  the US economy is growing faster than expected. More jobs & higher wages translate into rising consumer spending, the engine of the economyy. Therefore companies will sell more prodcuts and earn higher profits.  Helpful also are the ongoing efficiency gains (due to learning & technological advance) and the growth of the emerging markets (China, India & Co). Therefore the profit gains will overcompensate the negative effect of the rising interest rates and the stock market rally will continue. Enjy.

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