2023-10-07 11:33:43
Rising interest rates are poison for stocks: One morning at the Dresdner Bank, an old traveling salesman took me aside to tell me exactly this one sentence emphatically. “Rising interest rates are poison for stocks!”
The connections were already clear to me. The higher the returns, the greater their competition with stocks, the more expensive investments become, and so on. However, in the early years of my analyst life, I paid little attention to anything that could be associated with interest rates and bonds.
For me, the bond markets were boring at best and their name said it all: something for retirement. I am still very grateful to my colleague at the time for urging me to change my perspective.
Because this one scene, this one sentence stays with me to this day. When creating an overview analysis, usually over a weekend in a quiet room, there is almost always just one question at the very beginning: “Will interest rates rise permanently?”
Alarm bells are ringing
If the answer is, with good reason, “No!”, I am relieved to turn to my favorite analytical field, stocks. But if there is even a conditional “Yes!” in the room, I become thoughtful. That’s why alarm bells rang for me in the summer of 2000 when I first observed high-quality, long-term effective trend reversal signals on the bond markets. This observation had to have immediate consequences – and it did: Since then, my long-term, and not necessarily always medium-term, forecasts for both the bond and stock markets have been characterized by skepticism. “Rising interest rates are poison for stocks!” To put it briefly: This skepticism cannot change much today. “My” technology still allows little else: I have to continue the upward trend in yields and the downward trend in bond prices on both sides of the Atlantic. The situation on the stock markets was and is more exciting. You have shown yourself to be very resistant to all kinds of adversity over the past three years – even if it came at the expense of your nerves. But that too may now be over.
The Dow Jones chart shown shows two critical technical moments: On the one hand, its upward trend since the Corona crisis in the spring of 2020 has only just ended in eternal hunting grounds, and on the other hand, the medium-term oriented indicator shown has a “falling” signal generated. Taken on their own, both signals wouldn’t be so bad. That happens sometimes. But because these or comparable developments can also be observed on the European markets and especially here, you will probably only see sustained, significant increases in Dow prices in the foreseeable future if you turn your chart 180 degrees. Prices below 30,000 points are anything but out of the world with a view to the next few months.
Skepticism confirmed
What is particularly irritating to me, and at the same time confirms my skepticism, are headlines that see something like an autumn or year-end rally just around the corner, often with reference to the seasonally statistically very good fourth quarter, including a comparison to autumn 2022. They ignore, for example, that the mood this year is completely different than a year ago. At that time, fears of a Russian use of nuclear weapons in Ukraine were rampant, and that alone made thoughts of a rally, whatever the name, almost impossible. The stock markets were able to quickly bottom out and gain significantly: the worse the mood, the better the prices. But the reverse also applies – and that’s what we’re probably dealing with at the moment. The headlines mentioned at the beginning of this section are an eloquent example.
Something else is added. This requires a closer look at the medium-term oriented indicator displayed below the Dow chart: In October 2022, it generated a strong “rising” signal with a “positive divergence”. He was no longer able to understand the new low of the Dow Jones in regions around 28,700 points, but had already turned upwards again. The contrast to the current situation could hardly be more stark: the same indicator not only did not generate a “rising” signal coupled with a “positive divergence”, but also generated its smooth counterpart, a “falling” signal including a “negative divergence”. , added. So we are currently not dealing with a new strong “rise” signal, but with a new strong “fall” signal. There is no other way: optimism is misplaced – probably.
Back to the bond markets: somewhere around 5.5 percent, the long-term upward trend for US 30-year bond yields may take a major break and enter a correction phase. More on this in two weeks – because this could also be good news for the stock markets.
Wieland Staud is managing director of Staud Research GmbH in Bad Homburg.
#good #prospect #Dow #Jones