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LegiEX：Every investor is very concerned about interest rates

LegiEX: well, every investor is very concerned about what happens to interest rates, and this year's outbreak has been a good day for investors and central Banks to act. Raising interest rates is the most discussed issue these days. Why do we add? Is it a disguised plus or a direct plus? Is it not moving after adding? Or do we keep adding? Or is it down again after the addition? It is estimated that these problems are constantly disturbing the sleep of many people.

And the reason why stock investors are particularly concerned about this issue, in the final analysis, or to let themselves in the calculation of future stock price fluctuations, one more point to grasp.

In LegiEX's opinion, changes in interest rates can clearly affect stock prices and are generally negative. It's hard to say when this idea first caught on, but it's been around the world for years, by economists, financial experts, and securities analysts:

Karl Marx: "in times of stress in the money markets, the price of this security would double; First, because interest rates were rising, and second, because the securities were being pumped into the market in order to become money. In both cases, this phenomenon of falling prices will occur, whether the security guarantees to its owner a steady return, as in the case of state securities, or whether the increase in the real capital it represents will be affected by the disruption of the reproduction process, as in industrial enterprises." (the language of das kapital is a little bit more obscure, which simply means that liquidity is shrinking, interest rates are going up, bonds and stocks are going down.)

John Maynard Keynes: "people are as satisfied with their liquidity preference to hold money as they are with their interest income to give it up. As a result, when interest rates rise, some funds are diverted from the stock market to bank deposits, thereby reducing the demand for stocks in the market and causing stock prices to fall. On the other hand, when interest rates go down, some of the money is likely to come back into the stock market and send prices up."

William sharp won the Nobel Prize in economics in 1990. In his CAPM model, rf is the risk-free rate and ra is the expected rate of return on stocks. Since ra is positively correlated with rf, it is assumed that stock returns are fixed in a given period of time. If expected returns must rise, this in turn means a decline in stock prices

So if you have a strong idea in your mind that interest rates are negatively correlated with stock prices, it's not your problem. It's the problem of the experts

What is the reality?

The chart above shows the change in interest rates at the federal reserve between 1954 and 2014. As you can see, in the long cycle of 60 years, the interest rate changes are very dramatic, basically dividing it from the 80s, rising repeatedly before, and the difference between the highs and the lows is as high as ten times. And then it goes down again and again. If the argument that interest rates are negatively correlated with stock prices holds, then over the course of 60 years, stock prices should have a distinct "V".

LegiEX analyzes bonds:

This is a snapshot of the yield on the U.S. 10-year long bond market over the same period, and if you could flip it upside down in your head, it would be roughly the price of the bond -- it's a big V

But what about stocks?

LegiEX analysis: this is the dow Jones industrial average for the same period. Unfortunately, stocks have generally risen in both the long cycle of rate increases in the first three decades and the long cycle of rate cuts in the last three. No big V, no correlation.

Maybe 60 years is too long. Let's look at the effect of a short cycle of rate hikes. Let me show you the performance of the dow Jones index in the three fed rate hikes from near to far before this rate hike.

The most recent rate hike cycle, from June 2004 to July 2006, saw the fed raise rates from 1% to 5.25%, and the dow Jones rose from around 10200 to more than 11,000

The second was from June 1999 to May 2000, when the rate went from 4.75% to 6.5%, and the dow Jones rose from 10500 to around 10800

The third time, from February 1994 to February 1995, the fed quickly raised interest rates in a year, from 3.25% to 6%, during which time the dow Jones rose from 3,800 to around 3,850

Or consider the people's bank of China's interest rate hike from June 2006 to December 2007. During this period, the people's bank of China raised interest rates eight times in a row, 0.27% each time. The performance of the Shanghai composite index during this period is as follows:

At this point, we seem to conclude that in the real world, there is no significant correlation between changes in interest rates and stock prices over long or short periods. As to why, you can think for yourself. But is this fact in and of itself a reason for stock investors not to worry about interest rates?

Even for bond investors, there is little point in obsessing over the direction of interest rates (though the correlation between bond prices and interest rates is clearly high). The reason is that no one can accurately predict whether a central bank is entering a long "rate rise cycle" or something like that -- because the central bankers themselves do not know