Higher Interest Rates are Good for the Markets

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Higher Interest Rates and Higher Stock Prices

CymorFund has maintained the consistent view that the Stock markets are heading higher; that the disaster of 2008 when all values of everything fell dramatically has led to a much longer term recovery, and that we have not yet recovered from that 2008 meltdown. We believe that the markets are heading higher.
 

Rising Interest Rates

The great fear amongst investors is that rising interest rates will cause the market to plunge in value. Every time the Fed meets, or says anything, everyone waits for those events with bated breath. When interest rates are mentioned by the Fed, the market invariably takes a momentary plunge, before it then recovers.

This belief that somehow, if the Fed causes interest rates to rise, that the economic world as we know it, will come to an end, is NONSENSE.  It makes great fodder for the media, and for brokers who want to generate more commissions by having clients move in and out of stocks, but the reality is that rising interest rates are part of the normal routine of every economic cycle. As the economy improves, interest rates rise. When the economy gets overheated, the Fed attempts to dampen down the enthusiasm by raising interest rates even more.

There is nothing to fear from rising interest rates. They mean that things are getting better, that prosperity is growing, and that all is well.

We Are Proven Correct

Now we have further research to support what we are saying. 

Credit Suisse’s Andrew Garthwaite said in a note to clients on Friday – “We note that since 1998, changes in bond yields and equity performance have been positively correlated, (i.e. equities and bond yields have risen together), as we can see below.”

There are a few theories to justify this trend. 

“[T]ypically a rise in inflation expectations is positive for equities (with equities being an inflation hedge) when inflation expectations rise from sub 2% to over 2%,” Garthwaite added. Keep in mind, the stock market includes companies like Wal-Mart, Apple, and ExxonMobil, all companies that pass inflation to their customers and receive right back for their investors. 

In his note to clients on Friday, BMO Capital Markets Brian Belski also discussed this relationship between rising rates and rising stock prices. He explained that rising rates are actually sign of good things to come. 

“[S]ome of the best and most consistent average returns have occurred when interest rates have risen from very low levels – as is currently the case,” Belski said. “From our perspective, this means that the bond market is correctly anticipating future economic growth and staying ahead of inflation – things that typically benefit stock prices.” 

Reviewing the data since 1985, Belski found that the least favorable interest environments for stocks were when rates were low, below average, and declining. 

“This makes sense to us since lower interest rates are typically reflective of sluggish economic growth and vice versa,” he said.

 The following chart illustrates the point. This chart was published May 19, 2015 by Business Insider (linked)

Business Insider Chart of the Day
Business Insider Chart of the Day

 

I think that makes the point quite effectively.

 

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By Larry Cyna

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and continues as a strategic consultant to selected clientele. He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC’s with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section. He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder’s Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants. He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm. Mr. Cyna is well known in the Canadian Investing community. He is invited to, and attends presentations given by public companies usually 3 or 4 times each week. These presentations are intended by the various hosting companies to present their inside story to sophisticated parties and Investment Managers for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being a part of this keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

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