Tags: interest rates | stocks | bonds | Treasury

Experts: Rise in Interest Rates Might Not Hamper Stocks

By    |   Tuesday, 16 April 2013 08:21 AM

Appreciating interest rates often are associated with declines for the stock market, because they can mark the onset of higher inflation and lower bond prices, which push stocks to higher valuations relative to bonds.

But some experts reject that conventional wisdom and say the next interest rate hike could be accompanied by a rise in stocks, The Wall Street Journal reports. At least for a while.

Given that interest rates have dropped for 32 years to near-record lows, analysts say the next move for rates will be higher and could come later this year.

Editor's Note:
 
Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

Since 1950, when 10-year Treasury yields have stood below 6 percent (they stood at 1.72 percent Friday), a 1 percentage point ascent in yields has led to an increase of 3.25 in price-earnings (P/E) ratios, according to James Paulsen, chief investment strategist at Wells Capital Management, The Journal reports.

With the P/E ratio of the Standard & Poor’s 500 currently at 15.2, that implies a jump of 20 percent in stock prices, assuming earnings remain constant. This would put the S&P 500 at 1,907, up from 1,589 at Friday’s close.

Investors appear to be “seeing through” the current 10-year yield to the yield that may prevail without quantitative easing by the Federal Reserve, Seth Masters, chief investment officer of Bernstein Global Wealth Management, tells The Journal.

Therefore, the first few points of rate increases might bring Treasury rates closer to where investors assume they should be, without impacting the stock market, he notes.

As for the short-term direction of stocks, some analysts say first-quarter earnings reports will buoy the market. Of the 30 S&P 500 companies that reported earnings last week, 70 percent beat analysts’ profit estimates, according to Bloomberg.

“The set-up into earnings is pretty strong,” Jason Benowitz, a money manager at Roosevelt Investment Group, tells the news service.

“For the whole season, we think expectations are low enough that companies can beat. We’re not expecting the market to sell off on earnings.”

Editor's Note: Unthinkable Haunts Investors: Evidence for Imminent 90% Stock Market Drop.

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Appreciating interest rates often are associated with declines for the stock market, because they can mark the onset of higher inflation and lower bond prices, which push stocks to higher valuations relative to bonds.
interest rates,stocks,bonds,Treasury
352
2013-21-16
Tuesday, 16 April 2013 08:21 AM
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