Much Ado About Interest Rates - S&P Global

3m ago
11 Views
1 Downloads
559.93 KB
7 Pages
Last View : 8d ago
Last Download : 2m ago
Upload by : Emanuel Batten
Transcription

INDEX INVESTMENT STRATEGYSeptember 2013MUCH ADO ABOUT INTEREST RATESNow sit we close about this taper here,And call in question our necessities.Julius Caesar, Act 4Contributors:Fei Mei ChanAssociate DirectorIndex Investment Strategyfeimei.chan@spdji.comCraig J. Lazzara, CFASenior DirectorIndex Investment Strategycraig.lazzara@spdji.comWant more? Sign up toreceive complimentaryupdates on a broad rangeof index-related topics andevents brought to you byS&P Dow Jones Indices.www.spdji.comConventional wisdom tells us that rising interest rates are anathema to stocks. In recentweeks, the mere suggestion that the Federal Reserve might begin to taper, or reduce, itspurchases of long-term Treasury and mortgage securities has been enough to roil theequity markets in anticipation.Since yields peaked in 1981, the three subsequent decades have witnessed aremarkable bull market for bonds. The yield of the 10-year Treasury bond fell from morethan 15% in 1981 to its current level of less than 3% (see Exhibit 1).With interest rates at historically low levels, investors might reasonably assume that it’snot a matter of if but a question of when rates will increase. Hence stock market volatilityseems to spike with every suggestion of an imminent Federal Reserve action.Exhibit 1: 10-Year Treasury Yield from 1953 through 201318.016.014.012.010.08.06.04.02.00.0Source: Federal Reserve. Data from April 1953 through June, 2013. Charts are provided for illustrativepurposes. Past performance is no guarantee of future results.A Theoretical DigressionWhy do we assume that rising rates are bad for stocks? A review of basic finance mightshed some light on the relevant issues.One of the strongest arguments in favor of an inverse relationship between bond yieldsand stock prices comes from the classic Gordon growth model:DP k–g(1)in which1

Index Investment Strategy MUCH ADO ABOUT INTEREST RATESooooP is the fair value of a stockD is its current dividendk is the appropriate discount rate, andg is the projected growth rate of dividends.We can decompose the discount rate into a risk-free rate and a risk premium:k Rf Rp(2)So if the risk-free (e.g., the 10 year Treasury) rate increases, so does the discount rate k,and the fair value of the stock declines. Other things equal, rising rates are bad for1stocks, and falling rates are good.But other things may not be equal. We can expand equation (1) by remembering thatdividends are the product of earnings (E) and the payout ratio (PO), and that earnings area function of return on equity (ROE) and book value (BV):Other things equal,rising rates are badfor stocks, and fallingrates are good.D PO * E(3)E ROE * BV(4)So thatP ROE * PO * BV(Rf Rp) – g(5)Now, imagine a scenario in which the economy, having been in the doldrums, begins toperform better. This might well trigger an increase in government bond rates, which onits own should cause stock prices to fall. But equation (5) helps us to identify somepotentially countervailing factors: If the resurgent economy causes growth forecasts to increase, the g term in thedenominator of equation (5) will increase, which indicates a higher level of stockprices. Similarly, if corporate profits rise, the ROE term in equation (5)’s numerator couldincrease, pushing prices up. And if corporate boards and managements feel more confident, they mayincrease dividend payout ratios, leading to a further increase in the numerator ofequation (5).These countervailing factors might make it possible for interest rates and stock prices torise at the same time. In this scenario, rather than rates causing stocks to move, it’sbetter to consider that rates and stock prices can both be driven by the same set ofexogenous economic variables.1N.B. In this formulation it is rising interest rates that are bad for stocks, not “high” interest rates. Consider, e.g., a scenario inwhich high inflation produces high interest rates. Companies which can pass inflation through to their customers may do quitewell in such an environment, despite the relatively high level of nominal rates.2

Index Investment Strategy MUCH ADO ABOUT INTEREST RATESA Case for Discounting?Does the theory play out in practice? Exhibit 2 shows us the interaction of interest ratesand the U.S. stock market over the past 22 years. Since 1991, we can easily identifythree periods of rising interest rates and four periods when rates fell.While each of the three rising rate environments was characterized by particular idiosyncrasies, the S&P 500 rose in all three episodes, and in three of the four periodswhen interest rates declined. Since 1991, at least, interest rates seem not to have beena decisive factor in equity performance.Exhibit 2: 10-Year Treasury Rate from 1991 through 2013While each of the lastthree rising rateenvironments wascharacterized byparticularidiosyncrasies, theS&P 500 rose in allthree episodes.Source: S&P Dow Jones Indices and Federal Reserve. Data from December 1990 through June 2013. Chartsare provided for illustrative purposes. Past performance is no guarantee of future results.Worse yet for the theoretical argument: Between January 1991 and June 2013, theaverage monthly return for the S&P 500 was 0.85%. Paradoxically, in the three periodsof rising rates, the average monthly return was 0.96%, compared to an average monthlyreturn of 0.82% for the periods of declining rates. Rising rates have clearly not beenbad for stocks over the past two decades.Conventional Wisdom CorroboratedWe can extend Exhibit 2’s analysis back in time. This may be particularly usefulbecause, although we’re able to identify periods of rising interest rates in the past 202years, they pale in comparison to the rising rates of the pre-1981 bond market.3Exhibit 3 shows that since April 1953, the average monthly return of the S&P 500 was0.94%. Of the 722 months within this period, there were 347 months when the 10-year4Treasury declined and 358 months when it rose. In months when the 10-year Treasurydeclined, the average monthly return for the S&P 500 was 1.38%. This compares to anaverage monthly return of just 0.63% in months when the 10-year Treasury rose, lessthan half the return of the declining months. Consequently, measured over the last 60years, rising rates have indeed been bad for the stock market.2See Fei Mei Chan and Craig Lazzara, “Income Beyond Bonds,” S&P Dow Jones Indices, March search-income-beyond-bonds.pdf.3The data start in 1953 since the Federal Reserve ended its control of government debt markets in mid-1951. (Controls hadbeen instituted as a wartime measure in April 1942.) See Robert L. Hetzel and Ralph F. Leach, “The Treasury-Fed Accord: ANew Narrative Account,” Federal Reserve Bank of Richmond Economic Quarterly Volume 87/1 Winter 2001.4Of the total 722 months, there were 17 when the 10-year Treasury did not change.3

Index Investment Strategy MUCH ADO ABOUT INTEREST RATESExhibit 3a: Stock Performance in Rising and Declining Interest Rate Environments10-Year Down10-Year UpAllNo. of MonthsAverage Monthly S&P 500Return (%)3473587221.380.630.94Source: S&P Dow Jones Indices and Federal Reserve. Data from April 1953 through June 2013. Charts areprovided for illustrative purposes. Past performance is no guarantee of future results.Going further, Exhibit 3b breaks the data into modified “quartiles.” When 10-yearTreasury rates rose, the median increase was 14 bps, so we can use this breakpoint torefine our data sample into “large” increases and “small” increases. We can do the samefor periods of falling rates. (Coincidentally, the median monthly change when rates fellhappened to be -14 bps.) This lets us look at “large” and “small” rate declines separately.In the months when 10-year Treasury rates increased the most, the S&P 500 fell byan average of -0.12%. This quartile–with relatively large interest rate increases–is theonly quartile in which the S&P 500 declined on average. Contrariwise, in the 173 monthswhen interest rates declined the most, the S&P 500 experienced the best monthlyperformance (1.50% on average). Both results are consistent with the view thatrising rates are bad for the stock market.Data for the last 20years pose achallenge toconvention.Exhibit 3b: Interest Rate Quartiles and Stock PerformanceAverage MonthlyChange in 10No. of MonthsYear Treasury(bps)Biggest Declines173-33Moderate Declines174-7Moderate Increases1806Biggest Increases17832Average Monthly S&P500 Return (%)1.501.271.37-0.12Source: S&P Dow Jones Indices and Federal Reserve. Data from April 1953 through June 2013. Charts areprovided for illustrative purposes. Past performance is no guarantee of future results.A Challenge to ConventionThe data for the past two decades are not consistent with the entire history of the past 60years. The longer data set tells us that stocks do best when rates fall the most, and viceversa. But this does not seem to be reflected in recent years.To get a better sense of the timing of this apparent paradigm shift, we looked at thedifference in average monthly stock market returns contingent on interest rate behavior.For example, in 1970, the 10-year Treasury yield rose in four months and fell in eightmonths. In the four months when bond yields rose, the average return of the S&P 500was -4.27%; in the eight months when bond yields fell, the average return of the S&P 500was 2.86%. The “payoff” of falling rates in the stock market was therefore 7.12% in 1970,and that’s the value plotted in Exhibit 4.If the conventional wisdom is correct, all the values in Exhibit 4 would be positive – i.e.,stocks would always do better in months when rates fell compared to months in whichrates rose. For most of the 59 years plotted, that’s exactly what happened. Thirty-nine ofthe bars in Exhibit 4 point upward, meaning that falling rates were good for stocks 66% ofthe time.Interestingly, we begin to see far more exceptions to the conventional wisdom in the past15 years. Between 1954 and 1997, falling rates accompanied rising stock markets 80%of the time. Between 1998 and 2012, falling rates were associated with rising stocks only27% of the time.4

Index Investment Strategy MUCH ADO ABOUT INTEREST RATESExhibit 4: Average Monthly Spreads Between Declining and Increasing Interest Rates10%8%6%4%2%0%-2%-4%-6%-8%-10%-12%Source: S&P Dow Jones Indices. Data from 1954 through 2012. Charts are provided for illustrative purposes.Past performance is no guarantee of future results.Conventional wisdomis that rising interestrates are bad forstocks. Recent historyshows that's not aforgone conclusion.The post-1997 data are almost a mirror image of the full 60-year period. In the last 15years, the months when interest rates declined were also months when the S&P 500declined. Exhibit 5 shows the performance of the S&P 500 in declining and rising interestrate environments–this time juxtaposing the data for the two different periods (1953-1997and 1998-2013). The behavior of equities in the most recent history is starklydifferent from that of both the more distant history and the period as a whole.Exhibit 5: Interest Rates and Stock PerformanceAverage Monthly S&P 500 Return10-Year Down10-Year UpApril 1953-Dec 1997 (%)2.150.30Jan 1998-June 2013 (%)-0.381.81April 1953-June 2013 (%)1.380.63Source: S&P Dow Jones Indices. Data from April 1953 through June 2013. Charts are provided for illustrativepurposes. Past performance is no guarantee of future results.A Call for CircumspectionO! that a man might knowThe end of this day's business, ere it come;But it sufficeth that the day will end,And then the end is known.Julius Caesar, Act 5To what degree should the prospect of Federal Reserve tapering unsettle equityinvestors? The evidence does not allow a definitive answer. There are good reasons tobelieve that the prospective increase in interest rates will be bad for the stock market,and there are good reasons to believe the opposite. If it is true that interest rates andstock prices can both be driven by the same set of exogenous economic variables, it’sarguable that the variables that will lead the Fed to increase rates will also supporthigher equity prices.5

Index Investment Strategy MUCH ADO ABOUT INTEREST RATESAbout S&P Dow IndicesS&P Dow Jones Indices LLC, a part of McGraw-Hill Financial, Inc., is the world’s largest, global resource for index-based concepts, data and research. Home to iconic financial market indicators, such as the S&P 500 and the Dow JonesSMIndustrial Average , S&P Dow Jones Indices LLC has over 115 years of experience constructing innovative andtransparent solutions that fulfill the needs of institutional and retail investors. More assets are invested in products basedupon our indices than any other provider in the world. With over 830,000 indices covering a wide range of assets classesacross the globe, S&P Dow Jones Indices LLC defines the way investors measure and trade the markets. To learn moreabout our company, please visit www.spdji.com.Want more? Sign up to receive complimentary updates on a broadrange of index-related topics and events brought to you by S&P DowJones Indices.6

Index Investment Strategy MUCH ADO ABOUT INTEREST RATESDISCLAIMERCopyright 2013 by S&P Dow Jones Indices LLC, a part of McGraw-Hill Financial, Inc., and/or its affiliates. All rights reserved. S&P 500 andSTANDARD & POOR’S are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a part of McGraw-Hill Financial, Inc. DowJones is a trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). Trademarks have been licensed to S&P Dow Jones Indices LLC.Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute anoffer of services in jurisdictions where S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively “S&P Dow JonesIndices”) do not have the necessary licenses. All information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of anyperson, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Pastperformance of an index is not a guarantee of future results.It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based onthat index. S&P Dow Jones Indices does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offeredby third parties and that seeks to provide an investment return based on the performance of any index. S&P Dow Jones Indices makes no assurancethat investment products based on the index will accurately track index performance or provide positive investment returns. S&P Dow Jones IndicesLLC is not an investment advisor, and S&P Dow Jones Indices makes no representation regarding the advisability of investing in any such investmentfund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any ofthe statements set forth in this document. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefullyconsidering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or onbehalf of the issuer of the investment fund or other investment vehicle. S&P Dow Jones Indices LLC is not a tax advisor. A tax advisor should beconsulted to evaluate the impact of any tax-exempt securities on portfolios and the tax consequences of making any particular investment decision.Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to beinvestment advice.These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believedto be reliable. No content contained in these materials (including index data, ratings, credit-related analyses and data, model, software or otherapplication or output therefrom) or any part thereof (Content) may be modified, reverse-engineered, reproduced or distributed in any form by anymeans, or stored in a database or retrieval system, without the prior written permission of S&P Dow Jones Indices. The Content shall not be used forany unlawful or unauthorized purposes. S&P Dow Jones Indices and its third-party data providers and licensors (collectively “S&P Dow Jones IndicesParties”) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Dow Jones Indices Parties are not responsible forany errors or omissions, regardless of the cause, for the results obtained from the use of the Content. THE CONTENT IS PROVIDED ON AN “AS IS”BASIS. S&P DOW JONES INDICES PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITEDTO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWAREERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITHANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Dow Jones Indices Parties be liable to any party for any direct, indirect,incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation,lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages.To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certainregulatory purposes, S&P Ratings Services reserves the right to assign, withdraw or suspend such acknowledgement at any time and in its solediscretion. S&P Dow Jones Indices, including S&P Ratings Services disclaim any duty whatsoever arising out of the assignment, withdrawal orsuspension of an acknowledgement as well as any liability for any damage alleged to have been suffered on account thereof.Affiliates of S&P Dow Jones Indices LLC may receive compensation for its ratings and certain credit-related analyses, normally from issuers orunderwriters of securities or from obligors. Such affiliates of S&P Dow Jones Indices LLC reserve the right to disseminate its opinions and analyses.Public ratings and analyses from S&P Ratings Services are made available on its Web sites, www.standardandpoors.com (free of charge), andwww.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P Rating Servicespublications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.S&P Dow Jones Indices keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity oftheir respective activities. As a result, certain business units of S&P Dow Jones Indices may have information that is not available to other businessunits. S&P Dow Jones Indices has established policies and procedures to maintain the confidentiality of certain non-public information received inconnection with each analytical process.In addition, S&P Dow Jones Indices provides a wide range of services to, or relating to, many organizations, including issuers of securities, investmentadvisers, broker-dealers, investment banks, other financial institutions and financial intermediaries, and accordingly may receive fees or othereconomic benefits from those organizations, including organizations whose securities or services they may recommend, rate, include in modelportfolios, evaluate or otherwise address.7

better to consider that rates and stock prices can both be driven by the same set of exogenous economic variables. 1 N.B. In this formulation it is rising interest rates that are bad for stocks, not "high" interest rates. Consider, e.g., a scenario in which high inflation produces high interest rates.

Related Documents:

Masih banyak lagi nilai-nilai kearifan lokal Orang Rimba termasuk menganggap beberapa jenis satwa liar seperti harimau, beruang dan rangkong sebagai dewa sehingga otomatis terlindungi. Kearifan Orang Rimba juga tertuang di dalam seloko adat yaitu "Ado Rimba ado Bunga, Ado Bunga ado Dewa" yang artinya "jika ada hutan maka ada

inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest ris

4A. P. Rossiter, "Much Ado About Nothing," in Weil, p. 26. This essay appeared originally in Angel with Horns by A. P. Rossiter, ed. Graham Storey (London, 51961). The importance of the notion of wit in Much Ado has been particularly emphasized by two critics, Mr. Walter N. King and Mr. William G. McCollom. Mr. King, in his

Disguise in Much Ado About Nothing Disguise1 is very important in Much Ado About Nothing, particularly in the relationship between a woman called Beatrice and a soldier called Benedick. Beatrice and Benedick, who are both playful and clever, have disliked each other for many years. The

Much Ado About Nothing . Costume Design Notes and Sketches . Costume Designer: xxxx xxxxx . Welcome to Our Production . Xxxx Production welcomes you to a World of Shakespeare presented to you, new and improved in the 21st century. One of our first new productions, is our stage play Much Ado

Download by: [University of Bristol] Date: 23 November 2016, At: 04:15 . Grandmother cells: much ado about nothing Elizabeth Thomas & Robert French To cite this article: Elizabeth Thomas & Robert French (2016): Grandmother cells: much ado about nothing, Language, Cogni

The Problems of Patriarchy in Much Ado About Nothing Christa Wilson English Faculty Advisor: Dr. Paige Reynolds I n his renowned comedy, Much Ado About Nothing, Shakespeare sheds a critical light on the many failings of the authoritarian patriarchal structure of

Classical Comics Study Guide: Much Ado About Nothing Performance 11 MUCH ADO ABOUT PERFORMING THE PLAY WORKSHEET 6 TASK: Divide The Friar’s speech in Act 4 scene 1 into whole sentences or phrases. Each member of the class has one sentence or ph

Much Ado About Nothing. is one of Shakespeare’s few plays without a clear source for the plot. Shakespeare would have had access to plenty of love stories, however, similar to. Much Ado. Ch

Much Ado About Nothing Read the following extract from Act 1 Scene 1 of Much Ado About Nothing and then answer the question that follows. At this point in the play, Beatrice is discussing Benedick – having just been informed he is on his way to Messina. LEONATO You

duce deposit rates slightly and thus lower the interest costs of depository institutions. l)uring the 20 years from the mid—I 93Os to the mid—l9SOs, the ceiling rates on time and savings deposits were above market interest rates. In 1957 and 1962, when market interest rates rose near or above the ceiling rates on savings deposits, these

CHAPTER 1 INTERPRETATION 1. Definitions CHAPTER 2 RATING 2. Power to levy rates Part 1: Rates policy 3. Adoption and contents of rates policy 4. Community participation 5. Annual review of rates policy 6. By-laws to give effect to rates policy Part 2: Levying of rates 7. Rates to be levied on all rateable property 8. Differential rates 9.

Clinica Sierra Vista (CRV) Arvin Health Center (ACHC) ACHC Filtrene Gooseneck 151 1 24" CSV-ACHC-POU * Arvin Dental Office (ADO) ADO Filtrene Gooseneck 151 1 24" CSV-ADO-POU * Kern County General Services (KCGS) Arvin Library AL Elkay VRCTL8WSK 1 24" Fiber Glass KCGS-AL-POU * S

Adorno, Theodor W. ; Hullot Kentor, Robert [ed.] Current of music : elements of a radio theory Polity 10.1 Ado 3 Adorno, Theodor W. ; Leppert, Richard [ed.] Essays on music University of California Press 10.1 Ado 2 Adorno, Theodor W. ; Tiedemann, R. [ed.] Beethoven : the philosophy of music 10.1 Ado 1

The main types of mortgage interest rates are fixed and variable interest rates. According to World Bank, in higher and more volatile inflation environments, fixed-rate mortgages become either prohibitively expensive or too risky for lenders to offer. According to Njongoro (2013), mortgage interest rates reflect the general lending rate

their monologue) for the English-Speaking Union New York Branch Competition. The student must select . Much Ado About Nothing Benedick 2.3.22-36 w/cuts . I will hide me in the arbor. Much Ado About Nothing Hero 3.1.72-91 So turns she every man the wrong side out, How much an ill word

with fixed-term interest rate periods of more than 1 year. On average, mortgage interest rates in the Netherlands are 1 percentage point above the EU average. The central question is what would explain the high Dutch mortgage interest rates. The mortgage interest rate that banks charge their customers depends on the bank's marginal

student loans. All of those options would link interest rates on direct student loans to the rates paid on Treasury securities. One set of options would link rates on student loans to the rate for 10-year Treasury notes in the year a loan is disbursed—much like a fixed-rate home mortgage. Another set of options would reset the interest

changes on the exchange rate. However, changes on exchange rate cause changes in the local interest rate while changes on the foreign interest rates do not cause changes in the local interest rate. In addition, changes on both the exchange rate and foreign interest rate jointly do cause changes on the local interest rate. Finally changes on

ASTM SPECIAL TECHNICAL PUBLICATION 501 E. D'Appolonia, symposium chairman List price 15.50 04-501000-38 AMERICAN SOCIETY FOR TESTING AND MATERIALS 1916 Race Street, Philadelphia, Pa. 19103 9 BY AMEPaC N SOCmTY FOrt TESTING AND MATE LS 1972 Library of Congress Catalog Card Number: 77-185536 NOTE The Society is not responsible, as a body, for the statements and opinions advanced in this .