Markets change their tune?
For much of this year and, frankly, the past couple of years, markets have wrung their hands worrying about the impact of the removal of Federal Reserve stimulus in the form of ultra-low interest rates. What would happen when the Fed began raising interest rates? Would chaos ensue? Over the past week, stocks have seemed to become acclimated to the prospect of a near-term rise in rates undoing what had been a cycle of Fed-driven market reactions as depicted in Chart 1 below:
Chart 1: Markets have been beholden to Fed speech
One of the overlooked aspects of the interplay between stocks and bonds has been that when looking at shorter-term 2-year interest rates, stocks typically are actually very correlated to interest rates. Throughout the decade of the 2000s, you can see that rates and stocks marched very much in sync.
Chart 2: Stocks seemed to like higher short-term rates in the decade of the 2000s
But after the financial crisis, stock investors needed reassurance in heavy doses and the Fed was willing to accommodate. Lower rates kicked off a multi-year stock market rally which still – maybe? – lives on. Overlooked is the fact that shorter-term rates have been on the rise for three years now!
Chart 3: After a brief period of disconnect, stocks and rates are back to high levels of correlation
As we’ve seen this past week with stocks ripping off a couple of strong days en route to challenging recent highs, stock investors may have returned to thinking higher interest rates are not all bad, as long as a stronger economy is the reason behind the higher rates.
One table making the rounds this week came from legendary Wall Street fellow Byron Wien. Mr, Wien, a Vice Chairman at the massive investment house Blackstone Group, is perhaps most well-known outside Wall Street for his annual list of possible economic and market surprises published each January. We share his comments on his 2016 predictions at the bottom of this post. First, Mr. Wien recently wrote down some of the lessons he’s learned (and reasons behind his success) over his decades in the investment (and life) business. We hope you enjoy them.
Chart 2: Byron Wien’s life lessons
For more from Byron Wien, check out his predictions for 2016 below, published in January:
Byron Wien: Here’s Why I’m Not Optimistic for 2016
Stocks saw renewed strength from financial shares as investors pivoted to a near-term future where interest rates are higher and bank profit margins richer. Banks led the market to a +0.3% rise in Monday’s trade. Things really got going Tuesday as a strong home sales report joined enthusiasm toward technology shares and the strength in banks to lift the market by +1.4% and blast out of the recent modest downtrend in place throughout May. Wednesday profiled the rebound in oil prices with crude oil poised to break above $50 per barrel, almost a doubling in price since the low earlier this year.
Stock investors tossed an additional +0.7% on to the Tuesday rally to further solidify the notion that stocks are becoming healthier. Thursday offered a flat day to consolidate the gains while Friday held indexes firm to close a solidly positive week for stocks.
Warm wishes and until next week.