Cool Video: Bloomberg Interview-Rates, Dollar, and Equites

by
Marc Chandler
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In large gatherings of people, from airplanes to theater to conferences, we are often told to know the closest exit. The same is true for investing. No matter one’s confidence when they buy a security, someone is just as convinced on the other side who is selling the security.

Well into this 4.5-minute interview (click here for the link) on Bloomberg’s “What’d You Miss” show, Lisa Abramowicz asks the always important question. How will I know I am wrong?

The issue at hand was what is driving the stock market? The two main hypotheses are interest rates and earnings. I side with the latter while knowing full well that low interest rates have reduced a cost for companies and at the same time, recognizing US corporates have around $2 trillion of cash or cash equivalents on their balance sheets.

I cited an earlier post that argued that in the bull market from 2010 through last year, the S&P earnings rose an average annual rate of 9.7%, while the index rose at an average annual pace of 11.6%. With an economy growing above trend, robust global growth, tax cuts, and deregulation, there seems to be good reason to expect earnings growth to remain strong this year.

Interest rates may rise, though we have already seen nearly a100 bp increase in the 10-year yield since September 8. During that time the S&P 500 rose about 17% to a record high in late January, and despite the gyrations, it is still up over 10%. Of course, there need not be a one-to-one correspondence between rates and equities, and a spike in interest rates could be destabilizing. Ultimately if earnings continue to grow at a double-digit pace, it is not clear that the kind of rate increase that some economists are talking about (~another 50 bp or so increase in the 10-year) would seal the doom of the bull market.

We talked briefly about the dollar. I repeated the importance of the $1.26 area for the euro. Above there, and my longer-term outlook for the dollar is threatened. I suggest 3% yield is psychologically important in the 10-year. I also noted that if last Friday’s high in the S&P holds, that would warn that a deeper correction is in the offing.

About Marc Chandler

He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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