Conceding that it was not the best week for those with significant exposure to the AI Buildout (a theme we continue to view favorably) as the average loss for the 25 stocks in the table below since the end of June widened to 3.3%,…
…the major market averages all gained ground with many of the more-traditional Value stocks that we like enjoying a little time in the sun…or at least less time under cloud cover.
Needless to say, it is a market of stocks and not simply a stock market, but the fact that equity prices, on average, are up handsomely this year would seem to be illogical to many observers as one market strategist proclaimed in a front-page story in Thursday’s Wall Street Journal, “This is kind of finance 101. Higher interest rates make stocks less valuable.”
Statements like this continue to be made any time there is a short-term market selloff, but we remain perplexed that we continue to be one of the few publications that bothers to examine the history books before passing off fiction as fact. Yes, higher interest rates, all else equal, should make equities less attractive and debt more attractive from an investment standpoint, but all else is never equal. And one needs only look at the last five years for evidence that what might be true in theory is not necessarily true in practice.
After all, the yield on the 10-Year U.S. Treasury has soared from 1.58% since 10.09.21 to 5.24% today,…
…creating huge losses for popular long-term government-bond ETFs, while stocks became more, not less, valuable.
To be sure, we do not mean to suggest that equities somehow have permanent immunity to higher rates, while we also suspect that some fixed income managers may not have heeded the Warren Buffett admonition, “When the tide goes out, we see who has been swimming naked.” So, we wouldn’t be surprised to see some blowups in bond land that could negatively impact the financial markets.
However, the number crunching we have done shows that, on average, Value stocks have done better when the yield on the benchmark government bond is higher, yes higher, than today’s 5.24% level,…
…while sharp moves up in rates, have NOT proven to be problematic in the past, on average, for stocks, as the returns table for the S&P 500 showing prior periods with a 35% or greater increase in the 10-Year U.S. Treasury rate attests.
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Obviously, it is easier to keep the faith that sticking with stocks through thick and thin is the way to go when the major market averages are at or near all-time highs, but it is important to remember that there will always be trips south along the way,…
…with 10% Corrections taking place once a year, on average, and 20% Bear Markets officially happening every 3.7 years,…
…and an unofficial one (there as 20% drop on an intraday basis) occurring 18 months ago,…
…but the gains during the winning periods have dwarfed the losses during the times in the red.
True, there are plenty of issues about which to be concerned these days, including the continued conflict in the Middle East and the resulting spike in oil prices, but the long-term evidence suggests staying the course in stocks,…
…seemingly no matter the negative headline,…
…especially as over time equity prices generally have followed corporate profits higher,…
…while the current outlook for EPS growth for the S&P 500 is robust.
There are no guarantees that stocks will always prove rewarding, but investors have enjoyed handsome long-term returns,…
…with data dating back to 1925 showing that the longer the holding period, the less the chance of losing money.
While we are always braced for volatility and our portfolios are temporarily holding a bit more cash than usual as we head into the start of what should be a pivotal Q3 earnings reporting season this week, we will conclude this missive with a look at an interesting contrarian gauge, the Univ. of Michigan’s Consumer Sentiment index.
On Friday, the measure showed that consumers were feeling about as pessimistic as they ever have in the 48-year history of the survey, with prior troughs suggesting that it was a very good time to be buying stocks!
Stocks in the News
Jason Clark and Chris Quigley provide pertinent updates…
