My colleague Rafia Hasan wrote a nice piece on negative interest rates, what causes them and whether this all implies lower equity returns as well. We’ll be sharing her article with you on OneBite next week.
We concluded that we do see the weak economies and the inability of monetary policy to stimulate growth, but this does not imply that businesses will not manage through this environment and have success anyway. Equities can go up, even as the economy stays weak and interest rates remain at zero.
Good thing: today, we got more bad news, GDP growth as consistently poor as we have ever seen.
“In a year when the Fed was supposed to be on an orderly rate-hike pace of one per quarter, Wall Street now is talking about an economy that’s not going anywhere and a central bank that will follow suit.” – Jeff Cox, CNBC
Sadly, we have been discussing this for almost a decade now, with no sign of any improvement. But equities are doing reasonably well.
As Rafia warns us, we should not be reaching for yield on the bond side in risky, illiquid securities; we need to accept reduced fixed-income returns for a while. But we are staying the course with equities and have good reason for some confidence, despite the bad news about the economy.
Last point: things change. And sometimes, they change quickly and unexpectedly. Things might actually improve! Stay tuned.
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