Analysts Warn Stocks May Face Reality Check as Interest Rates Remain Elevated
The stock market is trading on the up again following the most recent rebound, which sparked a rebound in the economy and investor sentiment.
Analysts at Bloomberg are cautioning that the stock market may soon face a reality check.
Long-dated Treasuries and Strengthening Dollar Raise Concerns
Recent trends in long-dated Treasuries suggest that interest rates may remain elevated for an extended period. The strengthening of the dollar also reflects concerns about the same issue.
“However, stocks have gone their merry way — the longer they stay in denial, the worse the denouement for them,” warn analysts at Bloomberg.
Higher Neutral Rates Impact Stock Valuations
“Federal Reserve Bank of San Francisco President Mary Daly said that the neutral nominal rate could be as high as 3%. In real terms, that implies a neutral rate of 100 basis points. That is twice the estimate of 50 basis points that the US central bank has used over the years in its summary of economic projections, including as recently as last month,” the analysts added.
While two-year yields have also increased, the impact is more significant when investors seek higher rates over a longer time horizon. This shift should influence the discount rate investors use to evaluate the fair value of stocks.
Nasdaq 100 May Be Overvalued
“That fair value on the Nasdaq 100, for instance, is way lower than where the basket is currently trading,” the analysts added.
Short-Term Voting and Long-Term Weighing
The analysts also remind investors of a popular stock market saying: The market is a voting machine in the short term and a weighing machine over the long term.
“The longer stocks stay in denial of that dictum, the worse may be the eventual correction,” the analysts concluded.
