When interest rates rise..

[chopra]

Higher interest rate will lead to lower inflation. Inflation is the result and not the cause. E.g. the Fed can set interest rate at 2% but the Fed cannot set inflation at 2%.

Nobody said about FED setting inflation.

Higher interest rate will lead to lower inflation -- this is theoretical and more often than not, the effect is VERY MUCH delayed.

As observed from 2003 thru 2007, higher interest rate DOES NOT reduce inflation. The turning point only started in 2007.

 

[chopra]

firstly, the stock market is a leading indicator of the economy. so economy to crash is quite illogical just because you think we have bull runs in the recent years.

by the way, you call 2009-2011 a bull run? Dow returned 18.82%, 11.02% and 5.53% on these years. i would say they are just more of a recovery from a very low base of 2008. when the market tanked 34% in 2008, its quite likely the market will recover the following year as market goes in cycle.

im on the same opinion with Majestic that US interest rate might stay low for quite a long time. though it may sound extreme but my take is that there is a 20% chance of such an event happening. it has happened with Japan so might happen to US also.

Your first para contradicts second. As you mentioned, economy is always goes in cycle. A bull will be followed by a bear followed by a bull and so on.

On whether it's a bullrun --- debatable. DAX, DJIA and SPX to name a few, have already recovered ~80% (measured using 2007 peak to 2009 trough).

Share the same view with you and majestic that low interest rate will remain low for a few years. But my additional view is that this prolonged low interest rate environment is cancerous with all the cheap money floating around. I see market crashing another rd amid this low i/r.

In any case, we shall just be reactive to the situation and strategise accordingly.

 

[peterchan75]

As observed from 2003 thru 2007, higher interest rate DOES NOT reduce inflation. The turning point only started in 2007.

Please help provide the link to your source. Thanks.

 

[chopra]

Please help provide the link to your source. Thanks.

United States Inflation Rate

inflation: seasonal. notice the general increase trend from 2004 thru 2007.

United States Interest Rate

interest rate: increase from 2004 to 2007. Superimposing (which i didn't) will lead you to increasing interest rate with increasing inflation. This suggests the DELAYED effect of interest rate policy.

 

[peterchan75]

OK is Fed data. Do a regression analysis interest rate vs inflation from 1970 to 2011. The coefficient is around 0.61. 1 = perfect correlation. 0 = no correlation.

 

[chopra]

OK is Fed data. Do a regression analysis interest rate vs inflation from 1970 to 2011. The coefficient is around 0.61. 1 = perfect correlation. 0 = no correlation.

1. Dun really get your point. If high i/r leads to low inflation, "r" should be negative.

So I guess you are talking about -0.61?

2. The correlation does not suggest which is chicken, which is egg --- my very first statement to your comment.

 

[Hoo8899]

No doubt interest rate changes did affect the level of inflation, but without the help of other monetary measures it will not succeed. I would not argue on how interest rate is correlated to the inflation, but I would say the the inflation nowadays is the results of the quantitative easing from US and other nations.

On the TS question, I need to further stress that the relationship between the change of interest rate and stock market is very small. Sometime the interest rate hike is good for market, sometime is bad. TS has to first identify which one is "buy the expectation, sell the news"; which one is "buy on news".

 

[Majestic12]

Your first para contradicts second. As you mentioned, economy is always goes in cycle. A bull will be followed by a bear followed by a bull and so on.

On whether it's a bullrun --- debatable. DAX, DJIA and SPX to name a few, have already recovered ~80% (measured using 2007 peak to 2009 trough).

Share the same view with you and majestic that low interest rate will remain low for a few years. But my additional view is that this prolonged low interest rate environment is cancerous with all the cheap money floating around. I see market crashing another rd amid this low i/r.

In any case, we shall just be reactive to the situation and strategise accordingly.

Just to clarify, I do not think the US can ever raise interest rates ever again without adverse consequences. This is different from 'interest rates remaining low for the next few years'.

For them to recover, they may have to bankrupt the rest of the world via exported inflation.

 

[remy3413]

if the Fed starts to increase interest rates again, it's the same logic as lehman brother collapse

 

[Mecisteus]

actually all these topics are quite academic and theoretical. we can discuss until tomorrow as different people may have different views. but whats the point? can those macro knowledge of yours translate into money marking strategies? if you think yes, then good for you.

for me personally, i prefer to do micro views of companies. find those companies that are trading at reasonable valuations, good dividends record, consistent growths, etc, etc.

 

[Shiny Things]

Which sectors would feel the pain? Which would gain from it?

I only know REITs would be adversely affected due to their high-debt nature.

Financials? Shipping? Or the only things positively affected are treasury bond yields?

So, as a change from all the insane rubbish that's infested this thread, I've got an actual answer for you.

Tech and healthcare tend to outperform in environments of rising interest rates, according to S&P research from 2010 (boy, they were a bit early). Financials and materials tend to underperform. (You'd think consumer discretionary would underperform as well.)

Financials underperforming makes sense, because banks borrow short and lend long - rising short rates directly raises banks' cost of funding.

And yep, any heavily levered company (including REITs) is going to have a bad time.

 

[chopra]

actually all these topics are quite academic and theoretical. we can discuss until tomorrow as different people may have different views. but whats the point? can those macro knowledge of yours translate into money marking strategies? if you think yes, then good for you.

for me personally, i prefer to do micro views of companies. find those companies that are trading at reasonable valuations, good dividends record, consistent growths, etc, etc.

can't agree more.

 

[antonpoh]

So, as a change from all the insane rubbish that's infested this thread, I've got an actual answer for you.

Tech and healthcare tend to outperform in environments of rising interest rates, according to S&P research from 2010 (boy, they were a bit early). Financials and materials tend to underperform. (You'd think consumer discretionary would underperform as well.)

Financials underperforming makes sense, because banks borrow short and lend long - rising short rates directly raises banks' cost of funding.

And yep, any heavily levered company (including REITs) is going to have a bad time.

A Healthcare stocks i know of is already outperforming any other stocks now.. in this low interest rate environment. Go checkout Alliance Healthcare Services, Inc. (AIQ) - NYSE

Up close to 400% yesterday.. ya, on a single day.

 

[Hoo8899]

actually all these topics are quite academic and theoretical. we can discuss until tomorrow as different people may have different views. but whats the point? can those macro knowledge of yours translate into money marking strategies? if you think yes, then good for you.

for me personally, i prefer to do micro views of companies. find those companies that are trading at reasonable valuations, good dividends record, consistent growths, etc, etc.

Well say bro

 

[doody_]

A Healthcare stocks i know of is already outperforming any other stocks now.. in this low interest rate environment. Go checkout Alliance Healthcare Services, Inc. (AIQ) - NYSE

Up close to 400% yesterday.. ya, on a single day.

Found it too good to be true so I went to check it out. Sorry bro, that was a 1-for-5 reverse split...

 

[Yellowfin]

Even with low interest rate, Singapore or rather every country are facing inflation. The market have change so maybe new theoretical economic model will publish by some economic phd.

As long as interest rate do not rise rapidly within a short time then we are safe for the time being.IMHO.

 

[antonpoh]

Found it too good to be true so I went to check it out. Sorry bro, that was a 1-for-5 reverse split...

So that's 1000 shares become 200 shares? Was actually planning to buy in tonight. Thanks bro, just saw that news.

 

[Majestic12]

actually all these topics are quite academic and theoretical. we can discuss until tomorrow as different people may have different views. but whats the point? can those macro knowledge of yours translate into money marking strategies? if you think yes, then good for you.

for me personally, i prefer to do micro views of companies. find those companies that are trading at reasonable valuations, good dividends record, consistent growths, etc, etc.

It depends on what kind of trader or investor you are. I am macro while most here are micro - being macro has always felt simpler.

 

[Departure81]

It depends on what kind of trader or investor you are. I am macro while most here are micro - being macro has always felt simpler.

Why not be both micro and macro?

 

[Majestic12]

Why not be both micro and macro?

Easier said than done and it depends on the kind of stuff you're trading. I don't trade stocks.