The drumbeat for a market crash gets louder.
Yesterday’s Australian quotes a report from Australian Foundation Investment Company (AFIC).
It says:
‘We believe risks are elevated. There is the ongoing reliance on low interest rates to support sentiment and growth and the potential for subdued earnings outcomes.’
If there were an award for stating the obvious, AFIC would be the unchallenged winner.
Of course the market is relying on low interest rates. Does anyone seriously think any different? This is how it has been for six years. And if our bet is right, it will be like this for another six years — minimum…
Free Reports:
But what’s this?
It seems as though there’s another ‘Captain Obvious’ making an appearance. This time in the Financial Times.
Russ Koesterich, global chief investment strategist at BlackRock writes:
‘Still, once upon a time, a coup in an emerging market or the threat of a renewal of the cold war would have had investors worried about possible “contagion”. What is different now?
‘The simple answer is that this is a byproduct of central bank policies. Financial market volatility is mostly driven by the credit cycle. When monetary conditions are loose — meaning credit is both available and cheap — market volatility tends to be lower.’
What do you know? We could swear that we’ve been writing about this stuff for at least the past two years. Heck, it has probably been even longer than that.
The difference is that we’ve written it in a way that investors can easily understand. We try to avoid mumbo-jumbo financial whiz kid speak.
But it all amounts to the same thing. Like never before, central banks are working together to keep interest rates low, volatility low…and stock markets as high as possible.
That’s all you need to know.
Some days it feels as though we’re a broken record. (Remember records, kids?)
But it’s worth repeating, because the manipulation of interest rates is the single most important thing you need to know about the markets.
In the past, a major geopolitical event was a big deal.
The reason for that is obvious. There was probably at least a 50% chance that the event happened during a period of high interest rates.
In fact, it’s a reasonable chance that the event happened because of high interest rates.
Take the Falklands War in 1982 as an example. In the year before the outbreak of war, Argentina’s benchmark interest rate had hit more than 300%. By early 1982 it had fallen, but had begun to rise again as war became inevitable.
Argentina’s interest rate would go on to hit a record of 69,653,500% in March 1990.
By comparison interest rates were much better in the UK. Leading up to the Falklands War the UK benchmark interest rate was ‘only’ around 13%, and falling.
But when an economy has low interest rates, how much of a negative impact can a geopolitical event have on an economy? How much impact can it have on company earnings?
The feeling seems to be that it won’t have much impact at all.
We won’t deny it.
Whenever we see news stories that suggest ‘this time it’s different’, it sends a shiver down our spine.
And when we see mainstream analysts and investors repeat what we’ve said for the past two or more years, it puts us on edge too.
However, that’s not a bad thing. It helps to confirm our market view in two ways.
The first is that interest rates aren’t about to go any higher than they are now. That much is obvious. If geopolitical tensions increase, the last thing a central bank will want to do is to push things over the edge by raising interest rates.
What about the other way that this confirms our market view?
It’s simply this: even though low interest rates will help stocks surge much higher, the fact that many investors are only getting the message now tells us that the ‘old market’ isn’t dead.
By that we mean that investors haven’t become robots. They react to market events at different times.
Now, to you and us it may seem odd that anyone could only now figure out the impact of low interest rates on stocks.
But that’s the way it is. Of course, if individuals are still getting into the market now, more than two years after the dividend yield rally began, it tells you something. It tells you that investors will get out of the market in a gradual fashion too.
So when the time comes to get out of this market you should get plenty of warning signs. Just as investors have been slow to pick up on the positive impact of lower interest rates on shares, our bet is they’ll be just as slow to pick up on the negative impact of higher interest rates.
The good news is we don’t see higher interest rates coming anytime soon.
In fact, despite all the macroeconomic noise around the market, little has changed in recent months.
The US S&P 500 index is still up 7.2% since the start of the year. And it’s only just below its record all-time high. And as for the NASDAQ, it’s up 6.5% since the start of the year. That’s despite the slump in tech stocks during March and April.
And it’s despite the noise from the US Federal Reserve last week that suggested some tech stocks were expensive.
On the Aussie stock front, the return so far this year hasn’t been so good. We’ll admit that. The index is up just 3.5%. But then again, that’s better than cash. Add in dividends that stocks have paid out during the first half of the year, and you can almost double that index return.
Rest assured, we’re always on a crash alert. One day the market will take a big tumble. But it will need to be for economic reasons. As far as we’re concerned, a border conflict between Russia and Ukraine just isn’t a big enough reason for stocks to fall.
We know we’re the lone voice on this as the mainstream ratchets up the ‘fear factor’, but we’re prepared to put our reputation on the line. This is no time to sell stocks. This is when contrarian investors get to work and buy stocks while others choose to panic.
Cheers,
Kris+
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