From the RBA to the BoJ to the Fed, the market’s obsession with interest rates will go into overdrive this week. But it may be leading investors down the wrong path.
This column will join the market in watching every move - the potential for drama can’t be underestimated. And having pushed equity markets higher in the belief that rate cuts would underpin an acceleration in earnings growth, the obsession with the next monetary policies moves is understandable.But is there a danger that investors are too focused on exactly when rates will move, and not thinking enough about either the broader environment, or its impact on company valuations.
Almeida argues the rate cuts will support equity markets is questionable; rates tend to fall when economies are slowing, which is not good for earnings. In early 2001, as the dot com bubble burst, the Fed slashed rates only for the S&P 500 to plunge 40 per cent.He stresses he’s not necessarily predicting a correction of that magnitude.
“The average consumer can’t run down their savings any further, creating real distress for many people and a forced cut in consumption. And with the economy remaining at close to full employment and inflation above target, meaningful rate cuts are at best a long shot. It appears more likely that we are in for a slow grind,” he argues.
Almedia argues that for the first time since at least 2022 – and probably long before that, given how long we lived with near-zero interest rates – markets are “careening toward the point where fundamentals drive valuations rather than discount rates or manoeuvres by policymakers. Central banks cannot fix businesses that are broken.
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