5 Reasons Higher Interest Rates WON’T Crash Stocks
Many on the Street are convinced that interest rates and the stock market are intertwined. According to this theory, when rates are low, nothing can stop stock prices from climbing. On the other hand, when rates are rising and/or high, nothing can prevent them from sinking. I believe that this theory is primarily based on experiences from the 1970’s and the 2010’s. In the 1970s, the economy was terrible and rates were climbing, which caused the infamous stock market crash. Conversely, from 2009-2021, rates were extremely low and stocks (for the most part) soared.
However, stock performance at other times in history showed that equities can indeed jump when rates are high and rising. In the mid-1980s, late 90s and for the first eight months of 2023, stocks and equities climbed in high-rate environments. So it’s clear that the link between interest rates and the stock market is greatly exaggerated by many pundits and investors. Here are five other reasons I think that elevated rates won’t crash stocks in 2023 or 2024.
Strong Economic Growth
Traditionally, company profits are the main factor involved in determining stock prices. Profits are largely driven by U.S. economic growth.
This view predates the belief that interest rates and the stock market must always move in opposite directions. However, I believe this traditional view is correct.
U.S. economic growth is currently rather strong, as shown by last quarter’s 2.1% real GDP growth, and by the Fed’s prediction that real GDP zoomed 4.9% higher in real terms last quarter.
I believe the loans the government dealt out during the pandemic are a driving force behind the economic growth. The energy transformation that employs many Americans and spurs a great deal of investment is another factor, as well as Washington’s infrastructure investment and the onshoring trend.
The Strong Labor Market
Another primary catalyst of the U.S economy is domestic consumer spending, which correlates directly to the strength of the labor market. If Americans have a feeling of job security, they are more likely to spend, thereby driving the economy.
The latter theory, I believe, has been proven in the last 30 months. We have seen a positive impact on the economy through rapid consumer spending, thanks to the job market remaining powerful.
Although the labor market has become a bit less tight, it remains very strong at a 3.8% unemployment rate. The powerful labor market isn’t likely to change soon, resulting in significant profit and stock growth for most companies.
Many Consumers and Companies are Not Greatly Negatively Affected by Higher Rates
Government loans during the pandemic allowed a large percentage of companies to currently be financially independent.
Meanwhile, salary increases will prevent many workers from needing to take out loans, and most homeowners in the country are paying low interest rates on their mortgages because they refinanced their mortgages during the years when rates were miniscule.
Also worth pointing out (but never apparently noticed by those who believe that interest rates and the stock market must move in opposite directions) is the fact that many consumers and companies can and do benefit from high rates. Money market funds and CDs during high-rate periods can turn a huge profit for companies and consumers.
The Link Between Inflation and Economic Growth Has Been Disproven
Many who believe that interest rates and the stock market must move inversely contend that the Fed will have to stifle economic growth in order to conquer inflation.
Recently, we’ve seen that that’s simply not the case. Since the latter half of 2022, inflation has dropped sharply while economic growth has continued to be strong. Similarly, in the second half of the 1980s, U.S. inflation dropped sharply while the economy grew rapidly.
Multi-billionaire Ken Fisher attests that inflation is not caused by economic growth, but by “too much money chasing too few” goods and services. And the latter condition can be remedied without stifling economic growth and stocks, he stated.
AI Is a Positive Game Changer for Stocks
I, as I’ve explained previously, will make many if not most companies more profitable by significantly lowering their operating costs and enabling them to more easily obtain highly lucrative customers. And as we’ve seen already, the advent of AI is quite positive for many tech companies.
Given these points, the continued proliferation of AI is likely to be quite positive for American stocks.
This article was originally published on this site
