Interest rates

Here are 3 reasons why rising interest rates are complicating market timing attempts

Since the 1960s, the idea that financial markets accurately reflect the underlying value of traded shares have been widely recognized.

It is based on the idea that investors make their buy or sell decisions based on a logical assessment of a company’s future cash flows, meaning they consider all relevant facts and that markets efficiently distribute capital to firms.

However, in recent years it has become much more complicated than that. The days of rational investment and proper allocation are over – every market participant acts and plays freely according to his individual ideas and follows his own personal interests.

Although the law of supply and demand always prevails in the markets, many other elements influence the fluctuation of the markets.

1. The communication of news or economic indicators
2. Military conflicts of any kind
3. Inflation or deflation concerns
4. Government fiscal and monetary policies
5. Performance figures for companies or governments
6. Regulatory or deregulatory policies
The list is long, but let’s talk about two of the above points that have shaken the markets this year.

Concerns about inflation or deflation, and government fiscal and monetary policy.

The Federal Reserve has steadily raised interest rates over the past six months, four of which were massive increases of 75 basis points, in an effort to reduce inflation, which is still near 40-year highs.

The Fed takes into account the overall effects of its rate hikes to date when calculating future rate increases, according to a policy statement released after the most recent announcement.

The December meeting could see a half-point increase, then some smaller increases in 2023. Economists hope this signals a plan to slow the rate of increase going forward.

Still, the broad S&P 500 market erased 4.64% of the 9% rally that began in mid-October during the week. Jerome Powell said there were more rate hikes to come.

How do rising interest rates complicate attempts to synchronize markets?

Fed officials said they believe the surge in the inflation rate that initially occurred above the 5% mark in May 2021 was a transitory event that would correct itself. The Fed was forced to act in the face of persistently high inflation rates, which drove down the indicators.

It should be remembered that even if the evolution of interest rates makes equities more sensitive to downside risks, there are always opportunities for additional gains. The crucial factor, according to Rob Haworthsenior director of investment strategy at US Bank Wealth Management, is how [business earnings] will occur in the first months of 2023.

It is true that there have been times in the past when higher rates were accompanied by lower valuations and sub-par returns, notably in the 1970s and early 1980s.

That said, when rates are extremely low, the link between rates and equities changes.

According to BlackRock, the relationship between interest rates and valuations is murkier at current levels. At least historically, when rates are rising from lows, as they are now, stock market valuations are more likely to rise than fall.

Among the reasons why rising interest rates can impact stock markets is the competition between bond and stock yields.

“If interest rates rise, equity investors become more reluctant to drive up stock prices because the value of future earnings will look less attractive relative to bonds that offer more competitive yields today,” he said. Haworth.

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