Studying past financial periods and historical market data can be useful to investors. Just as with many of life’s pursuits, investors can learn a great deal from the events of the past.
By the publication of this column, the world will know whether Janet Yellen and the Fed have moved to raise interest rates. I have no guess as to how the stock market will have reacted to a decision to either raise rates or postpone to a future date. I can, however, predict with certainty that, whatever the Fed’s decision, it will be the topic de jour in the financial media.
The chart shows various financial statistics 20 years ago and today. Inflation, as measured by the Consumer Price Index, is actually lower today than in 1995. The S&P 500 index has more than tripled, as have earnings per share. Price-to-earnings ratios and dividend yields are similar. Notably, although oil prices have been halved over the past year, today’s crude oil price per barrel is still well above 1995’s $18.
Clearly, the figures that stand out are the wide differences in interest rates. The point being made is that slightly higher interest rates should hardly be a concern for the markets.
The markets could surely handle a measured, one-quarter-point increase in interest rates. However, considering the slow global economy, two things do worry some observers if U.S. interest rates were to rise too fast.
The first is reduced liquidity in the bond market. Changes in bank regulations have led to a decrease in bond trading. Popular investment models like “risk parity” and “value at risk” are holding huge, leveraged positions in bonds. Retail investors searching for yield also have jammed into bond funds. If rates were to rise too quickly and bond investors were to sell in quantity, the door wouldn’t be wide enough for everyone trying to leave the theater.
The other worry is that higher U.S. interest rates would likely further strengthen the dollar against the euro and emerging country currencies. That would hurt U.S. exports and could distort currency differences and money flows across the globe.
Of course, regardless of the market’s short-term gyrations, stock values 20 years from now should be considerably higher than today. The data in the chart works out to a 6.48-percent annual rate of return on the S&P 500 since 1995.•
Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or email@example.com.