Evocative of the saying, “You can’t keep a good man down”, you could easily say,
“You can’t keep a bull market down.”
Since the bottom in 2009, every time the market seemed to meet an insurmountable challenge, it found a way to power through.
Over the past month, hopes for global economic growth combined with the view that Central Banks would be ending their easing programs gave a lift to interest rates. This, in turn, seemed to be giving the stock market some headwinds.
However, Janet Yellen, last week indicated that the pace of rate increases would be moderate. Did Chairwoman Yellen just remove another obstacle to the ever-resilient Bull Market? Maybe so.
Stocks moved to new highs last week and again the Bulls are back in business. While the green light is on for stocks, we may have gotten a glimpse of what may end up being a factor that trips up the market one day.
Pay attention to the impact of interest rates on FAANG stocks
Investors should pay close attention to the impact of interest rates, especially on the legendary FAANG (Facebook, Amazon, Apple, Netflix, and Google) stocks that have led the market higher. The FAANGs performed much worse than the overall market when rates gave a hint of moving higher. Facebook, Amazon, and Netflix trade at very high multiples.
In part, this is due to expectations for future growth.
However, I suspect that growth is not the only reason. While high multiples for growth are reasonable, I suspect that they would not have as high multiples as they presently exhibit if interest rates were normalized.
Low rates create distortions. Interest rates are the price of money. With low rates, money is cheap. People and businesses use cheap money in inefficient ways.
In China, they built too many factories and too many empty cities.
Consumers bid up the prices of luxury homes in London, New York, and Miami.
Investors may well be bidding up certain stocks, like FAANGs, to levels that they normally would not if money cost more.
The situation becomes even more precarious given the large weighting these stocks have in the various index funds. If rates one day rise, the resulting decline in high flying stocks would be amplified by index funds.
As I mentioned earlier, Janet Yellen may have placed the day of reckoning further out to the future. For now, it’s still a Bull Market until proven otherwise.
However, it is important to consider interest rates as a “canary in the coal mine”. If rates move higher, more caution is needed.
Agriculture-related stocks look promising
On a different note, there still remain sectors within the market that have lagged and are worth a look. Agriculture-related stocks are one that I am viewing with great interest. Companies in the fertilizer, grain storage, and farm equipment areas have been struggling for years under pressure from low crop prices. This may be changing as agriculture prices have rallied.
If the recent upturn proves to be the beginning of a longer-term move, these stocks could be big performers.
— Ian Green, Pendragon Capital Management
Subscribe to Pendragon's Newsletter
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.