Here’s what I just read. Please comment. "Low interest rates are not likely to translate into higher stock prices, because this relationship is based on the assumption that people believe stocks will rise."
The above is a bit oversimplified in our view. Naturally, investors’ beliefs and actions are what ultimately decide the course of the price of an asset. However, in this case there are good reasons to think that investors do indeed believe stocks will rise. There are several reasons:
- [1] Stocks generally rise in nominal terms. Yes, there are multi-year bear markets, but from a very long-term perspective (50+ years), one sees that stocks move up on average. So, believing in higher nominal (!) stock prices doesn't hurt that much, taking a very long-term view into account. On the other hand, it’s not exactly that simple given that the financial system based on fiat currencies may not exist in the next decade, but that's what most investors believe.
- [2] Fed seems to be determined to use Keynesian methods to stimulate the economy, which is highly inflationary in the long run – inflationary not only for the prices of consumer goods, but also for other assets such as stocks.
- [3] Financial markets are more globalized and access to information is now greater than ever. Consequently, when people see a rally, they can join it in a matter of seconds. Thus a "snowball effect" is quite possible, when the environment is positive and there is a trigger.
- [4] Lower interest rates (and keeping them low for longer) impact stock valuations through the increased money supply for investors who now have more funds to purchase everything, including stocks. In addition, lower rates help businesses directly by making their loans cheaper and costs lower.
Point 3 makes the case for a rally given certain circumstances. Is the situation positive for stocks? Not really in real terms, as gold has been outperforming them for years now. But in nominal terms it is (point 2, 4, and especially 3). All that is needed for a rally is the trigger, and given the above, the promise of keeping rates low appears ready to do the trick. Summing up, we believe that stocks can and likely will rally in nominal terms, but not in real terms (compared to gold). Naturally, we prefer purchasing silver, platinum and gold to stocks.
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