For the last 40 years, interest rates have been in decline. So people can be forgiven when they have the view that the trend is down, it should be down, and if it ever goes up and something goes wrong then the solution must be to cut interest rates.
Unfortunately, during a secular rising trend, cutting interest rates aren’t the solution. Worse still, falling rates ARE THE PROBLEM. Adding QE and stimulus to rate cuts compounds an already bad situation.
Review
We have been unanimous in our view that the secular trend in interest rates is up rather than down and that increasing interest rates are good for the market. Our view preceded the Federal Reserve’s policy of rate increases starting December 15, 2015.
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“A single rate increase by the Federal Reserve in no way makes for a trend. However, markets often lead the way and what initially seems “bizarre” is only a natural change in regime, a change that we haven’t seen since the early 1940’s (December 16, 2015.).”
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“We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high (November 15, 2015.).”
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“Investors anticipating a general rise in interest rates should feel some comfort in knowing that most manager(s) in the utility sector are ready for what is to come. Rising interest rates are not an automatic death sentence for utility stock prices or earnings. In fact, the early stages of rising interest rates may see utility stocks match or exceed the returns of non-interest rate sensitive stocks, on a total return basis. Only when the outlook is cloudy will it become difficult to offer projections that are in line with prior expectations (September 4, 2014.).”
Current Rate Environment
As we have stated well before rates started to increase, in a secular rising trend in interest rates, going up will be good for stocks and the economy. What this also means is that in a secular rising trend in interest rates, going down will be bad for stocks and the economy. We have depicted the change below.
Rates Going Up
Rates Going Down
We have used the Daily 3-Month Treasury for one simple reason, when it goes up or down, the Federal Reserve ALWAYS follows.
Conclusion
The door has been closed on the rate cutting tool that the Federal Reserve has wielded like a force field against any perceived threat to the economy. However, the reality is that we’re in a secular rising trend in interest rates. ANY additional stimulus (fiscal or monetary) should be looked upon as prolonging the problem rather than improving or fixing the problem.
