As investors have become comfortable with the consecutive interest rate increases from central banks, the TSX, S&P 500, and NASDAQ experienced massive rallies over the past few weeks. The TSX inflated over 10% since its year-to-date bottom, followed by the S&P 500’s nearly 18% rally, while the NASDAQ climbed over 23%.
However, some investors forget that high-interest rates are not going away anytime soon. Here’s why:
Inflation is Still Overheated
Firstly, it’s important to recognize that inflation around the world is still overheated. Canada and the United States, for instance, have inflation of 7.6% and 8.5% as of July Consumer Price Index (CPI) data. Both countries have their policy interest rate set at 2.5%, although it likely won’t be long until it moves higher.
Throughout history, inflation had to be fought with an equally as high or higher policy interest rate. Otherwise, inflation would still have the fuel necessary to continue accelerating during the short-to-medium term.
In the 1980s when inflation was nearly 15% in the United States, there were swift actions taken by the central bank to decelerate the surging prices. Back then, inflation was caused by central bank policies that enabled growth in the money supply. The parallels between now and then are striking. Except, our inflation was largely created by CERB and stimulus packages being sent to individuals in North America who were now unemployed—thereby increasing the money supply.
Macroeconomically, the fundamental conditions that led to the exponential increase of inflation in the 1980s were also lurking during 2020. Economists just wouldn’t see the effects until two years later.
Why the Incentive to Own Stocks Could Deteriorate
At the start of the year, the first companies to get punished were small and mid-cap stocks. The incentive to own low-yield dividend-focused companies is also gone. This is because the 10-year note currently yields a higher return than the S&P 500’s average dividend yield of 1.5%.
However, Canada in particular has a variety of equities paying over 3% to shareholders. If the 10-year note were to move higher—which can sometimes rise with interest rates—there would be a sudden realization across the entire market that the risk of owning equities would be too high in comparison to more risk-averse assets which pay similar rewards.
As a result, it seems investors are brutally underprepared for what could occur within the next few months as central banks continue to tighten their monetary policies to de-accelerate inflation.
Additionally, valuations are still a concern in the public markets, primarily within the S&P 500. The cyclically adjusted P/E ratio, also known as the Shiller P/E, is currently 31.1. For comparison, the dot-com bubble reached a Shiller P/E of 44.1 and crashed down to nearly 23. According to 150 years’ worth of stock market valuation data, the median is 15.8. With that being said, multiple compression can happen in a handful of ways.
If quarterly earnings across the S&P 500 begin to drop, or the price of equities within the index drop, the valuation multiple would compress. Conversely, if earnings began to soar while equity prices remained stagnant, that could also shrink the ratio. Though, the latter is rather unlikely given macroeconomic headwinds.
Overall, there is a strong possibility that investors haven’t yet recognized that high-interest rates, alongside further uncertainties, are likely to persist over the next few years.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
