Investment Commentary – February 2, 2022

Year to Date Market Indices as of February 2, 2022
• Dow 35,274 (-2.55%)
• S&P 4,535 (-4.02%)
• NASDAQ 14,994 (-6.94%)
• Barclay Bond Aggregate (-2.21%)
• Fed Funds Rate 0-0.25 (0-0.25)
• Annual Inflation Rate 6.8% (As of 11/21/21)

Why rising rates won’t derail stocks

Blackrock analyst Russ Russ Koesterich discusses how history suggests that higher interest rates can help, not hinder, stocks.

As the vaccine rollout accelerates and case growth turns meaningfully lower, it seems that higher rates have replaced the virus as investors’ biggest concern. History would suggest that this fear is somewhat exaggerated. While higher interest rates can temporarily disrupt stocks and often cause violent sector rotations, in the past higher rates have been associated with higher, not lower stock prices.

To start it’s important to note that the empirical relationship between rates and stocks is more complicated than textbooks suggest. In theory, all else equal higher interest rates should lead to lower stock prices as you discount future cash flows with a higher rate. Although the logic holds, this model ignores the fact that higher rates are generally accompanied with faster economic and earnings growth.

A complicated relationship

It is true that there have been historical periods, notably the ’70s and early ’80s, when higher rates coincided with lower valuations and poor returns. That said, the relationship between rates and stocks changes when rates are very low. At current levels the relationship between interest rates and valuations has been more ambiguous. At least historically, stock valuations have been more likely to rise than fall when rates are rising from low levels, as is the case today.

This tendency can also be seen when comparing changes in rates to changes in stock prices. Since 1995, in months when the U.S. 10-year treasury yield rose by more than 50 basis points (bps), over the following three months the S&P 500 posted a price gain of 3.2%, roughly 100 bps higher than a typical month.


JP Morgan CEO Jamie Dimon sees the best economic growth in decades, more than 4 Fed rate hikes this year

Jamie Dimon said the U.S. is headed for the best economic growth in decades.

Dimon, the longtime CEO and chairman of JPMorgan Chase, said his confidence stems from the robust balance sheet of the American consumer.

Dimon said that while the underlying economy looks strong, stock market investors may endure a tumultuous year as the Fed goes to work.

Jamie Dimon said the U.S. is headed for the best economic growth in decades.

“We’re going to have the best growth we’ve ever had this year, I think since maybe sometime after the Great Depression,” Dimon told CNBC’s Bertha Coombs during the 40th Annual J.P. Morgan Healthcare Conference. “Next year will be pretty good too.”

Dimon, the longtime CEO and chairman of JPMorgan Chase, said his confidence stems from the robust balance sheet of the American consumer. JPMorgan is the biggest U.S. bank by assets and has relationships with half of the country’s households.

“The consumer balance sheet has never been in better shape; they’re spending 25% more today than pre-Covid,” Dimon said. “Their debt-service ratio is better than it’s been since we’ve been keeping records for 50 years.”

Dimon said growth will come even as the Fed raises rates possibly more than investors expect. Goldman Sachs economists predicted four rate hikes this year and Dimon said he would be surprised if the central bank didn’t go further.

“It’s possible that inflation is worse than they think and they raise rates more than people think,” Dimon said. “I personally would be surprised if it’s just four increases.”


News Around The web:

Upbeat earnings
As of Friday, fourth-quarter profits at companies in the S&P 500 were expected to increase more than 24%, based on companies that have reported so far and forecasts for firms that haven’t yet released earnings, according to FactSet. That’s up from the 21% rise that had been projected at the end of December.

GDP surge
The U.S. economy picked up momentum in the final three months of 2021, expanding at an annual rate of 6.9% in the fourth quarter. Overall, GDP growth in 2021 was 5.7% on an inflation-adjusted basis—the fastest growth since 1984—as the nation rebounded quickly from the pandemic-induced recession in early 2020. Most economists expect more modest growth this year.

Fed’s rate outlook
As expected, U.S. Federal Reserve policymakers signaled that they remain on track to begin lifting short-term interest rates at their next policy meeting in mid-March. The Fed didn’t indicate how many additional increases it expects this year as it tries to prevent a further surge in currently high inflation. (indices)