Years of Zero Interest Rates and Implications for Stock Prices

US Federal Reserve Chairman James Powell has said interest rates are likely to stay low for years as the economy fights its way back from the coronavirus pandemic.

For decades, the goal of US Federal Reserve was to control inflation. Inflation control has now been de-emphasized, the main goal is now maximizing employment. This is a huge shift. The US Federal Reserve is very powerful and now the Federal Reserve is pushing for full employment and using years of zero interest rates as a tool.

Don’t fight the Fed

There has been fundamental investment wisdom which “Don’t fight the fed”. You are supposed to line up your investments with Federal Reserve Monetary policy. Buy stocks when interest rates are low and avoid stocks when interest rates are high.

There is and has been an inverse relationship between the stock market’s valuation multiples and interest rates. Ten-year treasury rates have fallen to 0.72%. The central bank now will allow inflation to float above the Fed’s 2% target for a period of time. The Fed no longer will hike rates in order to head off inflation that historically had come with lower unemployment rates.

There will be a zero-interest-rate policy and open-ended quantitative easing (QE) for the next five years.

The projections are that the ten-year treasury interest rate will stay around 0.6 to 1.0% for five years or longer.

Many finance papers and financial sites have a regression analysis of the inverse correlation between interest rates and the price-earnings ratio of the SP500 stock index.

At Financial Wisdom Forum, there are multiple online calculators for different fair price-earnings multiples based upon the ten-year bond interest rate.

The very low-interest rates imply a fair price earnings multiple of 150 to 440. Even if the ten-year interest rates were assumed to be 1.5% then the fair price-earnings multiple is 87 to 107. The lower number is for a formula of a multiple of the average ten-year earnings multiple of the price.

The SP500 has only had the PE Ratio stay above 30 from 1998 to about 2003.

Japan’s Zero Interest Rates and Japan’s PE Ratio

Japan has had zero interest rates for over 20 years. Japan has not had consistent ultra-high PE ratios after their crash. They did have PE ratios over 60 for two extended periods from 1987-1991 and from 2003 to 2008.

New Zero Interest Rate Territory for the USA

The ten year treasury briefly was below 2% before 2019. It happened in 2016 and 2012. It got as low as 1.46% in 2016.

The difference for the US situation and the Japan situation is the zero interest rate situation is now completely global. Japan, Europe and now the USA all have zero interest rates.

China’s ten-year interest rate bonds are at 3.1% and were 2.5% in April during the worst of the Pandemic financial dip.

This is combined with quantitive easing. Quantitive easing is when the central bank purchases longer-term securities from the open market in order to increase the money supply.

Constantly adding trillions to the money supply. No return from bonds. Stocks the only major option for returns. There is still gold, cryptocurrency and real estate.

The inflation statistics will report that there is no inflation but how much should you believe those reported statistics?

Will the old formulas (1970-2020) still maintain the inverse relationship?
Will the old formulas apply in the sub-1.5% interest rate zone?

Multiple years of an index PE ratio at 60 is possible. Nothing is certain, but the Federal Reserve is giving a guarantee of near-zero interest rates for years.

If you believe that asset prices will go down, then you are saying that zero interest rates and trillions in quantitive easing money printing will not drive prices up. Asset prices mainly refers to stocks and real estate.

SOURCES- Financial Wisdom Forum, CNBC
Written By Brian Wang,

43 thoughts on “Years of Zero Interest Rates and Implications for Stock Prices”

  1. The money is not all invested. A small percentage might go to fund a capital project somewhere but the majority of it sits in offshore banks or are used to bid up the price of some stocks or commodity.

    We can't have a situation where all of the nation's income goes to bid up the price of things and nothing goes to buy products that the nation produces. There must be a balance.

    The size of the economy is the amount of spent on what the nation produces. If a $100 million is spent on buying a Van Gogh all that happens is a bank transfer from one billionaire to another. No one gets a meal out of it.

  2. Greeaaat… so that rich will be able to buy assets cheaply, while poor are struggling due to prices rising. What can possibly go wrong in a country where socialist miiltia and revolutionized minorites are fighting the police and attacking-and killing-their politcal oponents?

  3. Jared is not wrong, at least, not at the end there. While some of us might be capable of producing a fully referenced paper on an issue, we wouldn't do it here. Even if it didn't require huge amounts of effort, thereby demanding a higher platform, one where it could be peer reviewed (or else make some money), it also would not begin to fit within the word limit for these posts.

  4. I have no doubt that's the excuse they used. I also have no doubt that if the tables were turned, *I* would have been required to go through bankruptcy to escape the commitment.

    They weren't.

    Doesn't change my point: When hyperinflation looms, if you can't avoid debt, the best sort of debt to have is fixed rate, but don't count on it staying fixed rate after your creditor goes crying to the courts.

  5. Also known as BlueChilli, this comment thingy decided to rename me.
    Regarding the matter at hand, all those processes need to be tried & proven in space. I have now idea tbh how well are e.g. metallurgical processes characterized in low- & zero-G or how could we use a distillation column (pumps etc instead of gravity?).
    Perhaps initially mining would consist of only extracting volatiles but those might still need to be refined / purified.

  6. If it's any conciliation they probably would have gone bust if the judge hadn't done that. I invested into the oldest pension fund in the UK in the 1990s and some bright spark there had the idea of offering guaranteed annuities at 6% or so. They tried to wiggle out of it when rates plummeted but the courts wouldn't let them. Went into receivership soon after.

  7. to be fair, the 'rich' do get access to investing opportunities (and thus additional incomes) way above and beyond mere street-level citizens – whether that is due to the practicality of investing huge sums with fewer owners or the old boys' club network or just blatant cronyism/ brown-noserism among those looking for investors is unclear.

  8. aha – but what is the potential for such 'in-space activities'? Orbital hotels, short-term residences, learning/research outposts, commercial ventures – it could be the Macau/CalTech for the sweet spots within the LEO, GEO, Ls areas. Certainly the raw materials and transportation provided in-situ from NEAs could accelerate such dreams, designs, and realities. A long-weekend in orbit for under $100k by 2050. fingers crossed but what would the waiting list be like?? 10 years for 1000 spots? SpaceX could be the fundamental circulation system to invigorate such infrastructure activities.

  9. ha. Right. Because we are in a highly accredited, profoundly prestigious, eminently reliable, academically/ technically prominent forum here filled with salient Ph.Ds, brilliant minds, and other great thinkers — whose wisdom and ingenuity shall advance forth such well-articulated topics into masterful works of engineering majesty – arXiv, singularity U, and TED-of-old would be jealous. Silly bit$h, we're just rapping all technical like – throwing the future dreams around on a lazy sunday afternoon.

  10. Maybe we don't necessarily need to get SpaceX into mining, just transporting a LOT of stuff over there & back for the real miners may prove enough. Still, imo the customer base for such mining might only consist of in-space activities for now at least.

  11. Those tightened regulations only apply to us peasants, apparently; considering the Fed started buying corporate bonds or so we're told. In which case I think the next Nobel for economy goes to the guy that'll figure out how exactly price (rate) discovery works in this brave new world. Or just stay tuned to whatever comes out of the mouth of those picking winners and losers and orient accordingly.

  12. Yup… guys with guns – aka govt in any of it's incarnations / branches – can void pretty much anything they don't fancy; like private ownership of gold and free-market price discovery, things that even you americans got a taste of. That last gem coming from none other than Nixon – I'm sure you know these things Brett, it's for whoever else reads this.

  13. A universal life insurance policy with American General. 9% guaranteed rate of return. Until inflation dropped, and they found a judge willing to change it to 3%.

  14. maybe yes. maybe no.
    "…Most future concepts for the exploration and exploitation of space require a large initial mass in low Earth orbit. Delivering this required mass from the Earth's surface increases cost due to the large energy input necessary to move mass out of the Earth's gravity well. An alternative is to search for resources in-situ among the near-Earth asteroid population. The near-Earth asteroid resources that could be transferred to a bound Earth orbit are determined by integrating the probability of finding asteroids inside the Keplerian orbital element space of the set of transfers with an specific energy smaller than a given threshold. Transfers are defined by a series of impulsive maneuvers and computed using the patched-conic approximation. The results show that even moderately-low-energy transfers enable access to a large mass of resources….(2011)"
    …more after the break…

  15. Asteroids are far off in time and that doesn't change because it is based on orbital mechanics, unless SpaceX goes for nuclear propulsion (of which I would be in favor).

  16. The "rich" don't sit on their money like Scrooge McDuck.

    If they have lots of actual money on hand, it is invested, otherwise "the rich" slowly become poor due to inflation.

    If they are like Bezos, Musk, Gates, etc then their wealth is not liquid- it is stock in their respective companies and it isn't easily fungible capital.

  17. "(I had some fixed rate assets that I purchased in the mid 80's that were doing so well after inflation dropped that I was looking at early retirement, until a court voided the fixed rate. I've never trusted since that contracts will be upheld.)"

    Aah so you invested in Volcker bonds. I always wondered what happened to people who bought those, now I know. Knowing that courts voided bonds is distressing.

    Interest rates will stay low (compared to historic rates) even when the economy picks up. As I said months ago when the pandemic broke, the currency will take it on the nose and the big losers are the millennials who don't already own homes and who have large college debts.

  18. "…an improving economy results in private sector borrowing competing with the government sector, driving up interest rates…" wait. what? Are suppliers of debt or the actual availability of debt scarce? I don't disagree, but rates are not likely set by the number of borrowers all fighting for a limited supply of debt – or is that wrong? — especially due to recent tightened regulations on borrower quality and loaners having sufficient reserves. Banks don't need to follow Fed rate moves, as i understand it, but there are competitive disadvantages.

  19. "…Group productivity is greater than the sum of individual contributions because of work specialization…" that's in factory settings, old-style hierarchical offices (here susie, take a dictation and formalize it in your typing pool), and other such places where you have one thinker and two or more assistants/ igors/ boot-licks. Those should become increasingly marginalized in the coming decades. If you're talking about the idea that we need dozens/ hundreds of differently-skilled workers to build a building, for example, well that's non-sensical, since every thing is the sum of other things all requiring specialist input – where would you draw the line? I don't agree that apathetic and ambivalent are not typical in real leader/doers or that the lack makes for a great doer (why do we care if they are a leader?) – we want entrepreneurial/ driven individualists (probably self-made) not shepherds or prophets. That all being said, i do hope that software/ tech/ AI eventually make it more likely to have 'positive' result collaboration (like mathematicians coming together to bounce ideas off each other so each can solve problems each has) — that's group 'productivity'. I am not sure if we cloned millions of Harry Potters the world would be better as compared to hagrids or any other Hogwarts prof (harry is more of a sheep-hero).

  20. Group productivity is greater than the sum of individual contributions because of work specialization. Randian personality profile refers to book characters, right? Since you're allowed to use fictional characters as templates for human behaviour, I choose Harry Potter :). Apathetic and ambivalent are not typical traits of any leader/"doer"/creator btw.

  21. i 'only' went up 40% 'because' of the debacles in March. 2020 is a one-off year that shall never repeat irrespective of how many future pandemics, trumps, 10-year unending growth records, lock-downs, bitcoin fanaticism events, etc., that occur. If ever there was a hysterical year for equities, such is the now. Even post WW2 and great depression had nothing on the emotional eccentricity of the markets – like they say, keep 20 – 30% investible cash at all times.

  22. mostly the months and years of reading tid-bit, sciencey link-bait/ failed company sites: Futurism, NBF, IFL science, wired, physics world, Planetary resources, DSI, Bradford Space, techtimes, (the space bubble-hotel people), (even a few MIT tech review articles), even re-linked from WSJ-FT-Guardian,etc, and such – costing and timing on pie-in-the sky lunar bases, cis-lunar bases, asteroid exploitation schemes, mars colony adventures, orbital factories, free-floating shipyards, and their ilk. At one time in the early 2000s, still in school, i used to make a spreadsheet of every space-related construction/ mission scheme all the way back from the 80s along with costs and milestones to present time (over 5 years ago) – had a hundreds of entries all showing fantastical timelines – interesting to see how project scale, scope, and 'readiness' ebbed and flowed with time. — like comparing the bladerunner, terminator, space odyssey, aliens, BSG, MAdMAx, RoboCop, back-to-the-future milestone dates, with whats happening now, in those movies/ franchises…

  23. having not seen the movie in over 15 years, I was personifying him as ruthless individualist. 'Mentally ill' is a vague and judge-y concept and I'm not sure where trustworthiness even comes into play as we assume 'legal' if not transparent, in everything. Perhaps an Ayn Randian character who is simply ambivalent, apathetic, and hyper-driven is the closer 'necessary' caricature – create, persevere, and push forward. Until I see 'group' productivity greater than the sum of the potential productivity of its individual components in the 'services' sector – i choose to follow a Randian personality profile to re-ignite and push western economies forward.

  24. Pretty much: Keeping interest rates low at all costs has become an existential priority for the US government, because the 2007 bail out drove our debt level so high that the only reason we can service the debt is that the rates are near zero.

    It's a trap, because an improving economy results in private sector borrowing competing with the government sector, driving up interest rates. And we're now at a debt level where any improvement in the economy will probably raise the cost of servicing the debt by more than it raises revenues.

    It's a good time to be a debtor, I suppose, as long as you avoid variable rate debt. And, as long as the government doesn't get the bright idea of forcing people with fixed rate debts to accept having their interest rates converted to variable… a real possibility, IMO. (I had some fixed rate assets that I purchased in the mid 80's that were doing so well after inflation dropped that I was looking at early retirement, until a court voided the fixed rate. I've never trusted since that contracts will be upheld.)

  25. Gordon Gecko is a fictional character, "realistic portrayal of the successful corporate psychopath"( according to wikipedia). I don't see how becoming mentally ill helps economics. There are studies that show that after a ( surprisingly low, under 5%) percentage of people in a group become untrustworthy, the group itself breaks down. This would surely mean a lot of extra costs if trust becomes a scarce resource.

  26. The markets are messy right now. I definitely know what it's like to make 25K in a single day, and lose 25K in a single day. All in, the trend line is up. Went up 40% this year to date despite the debacles in March and last week. You have to navigate carefully, ignore the hype, and go with your gut. 2020 is definitely a learning experience.

  27. As long as the rich get the lion share of the national income there will be excess capital and diminished demand. This means that the prime interest rate will remain low. The law of supply and demand.

  28. i heard its 15 years and $50B before we get our first pound of industrial grade ore/ useful fuel compound from the local orbital bodies – hard sell at this point. 15 years and $200B past that before we get our first sustainable off-earth outpost. 15 years and 0.9$T past that before we get our industrially-productive colony which provides meaningful trade/ resources/ tech to humanity in general. That's likely a time when the world's GDP is either 5x as much or 1/5th as much and the world is 3F hotter and 3B more people. Space will likely be part-time for the top 0.1% of G7 countries by after-mid-century – i.e. rich resorts, esoteric research, Moonraker-type conflicts (love the astronaut laser fights), and small military-industrial 'projects'. Keep saving for anti-ageing work and a LEO timeshare.

  29. I am reading two things from this article: 1) vast sums thrown at the current pandemic – how do economies recover, function, and prosper in anything less than a decade from now under such debt loads (and with so few other monetary policy tools left)? 2) how does one get into the top 25% in income (always assumed when one declares they are looking for the best 'returns') without being the top 25% in smart, top 25% in productive, or top 25% in facilitator (the Musk effect)? (1 yes its a problem, see image)(2 real estate, good job, and 'invest in your family first') The key take-away is that you have to let the economy run hot for the foreseeable future, invest in high-output industries (car, construction, computers/phones), and cut feel-good spending/ red-tape. Hyper-conservative economics but we need people working harder, smarter, and to just Gordon Gecko their lives going forward (nice people finish last)

  30. Low interest rates have pushed housing prices up in the midst of the pandemic.
    Interest rates can't go up or the federal government would need to pay out more of the budget to interest on the debt.
    Long term everything dies, even currencies. Death is inevitable, hedge with BTC.

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