Valuations typically fall when interest rates rise, but not now

By Jeffrey Cohen

We are seeing US equity prices, commodity prices, and even the whole U.S. GDP rise amidst a choppy season in the markets.

What does that say about the relationship between valuations and expected future interest rates?

We doubt that the fundamental relationship has changed, so it must be the view on future interest rates.

We think that interest rates are going to stay higher for longer. We are expecting a contraction in valuations. We see inflation as more 'sticky' and the US Federal and State Governments needing to borrow more, which drives up real interest rates.

However, market valuations have been bouncing higher and lower. This is likely due to significant market disagreement on the levels of future interest rates. This is why people talk about the Fed Pivot, or when the Fed will start to lower policy interest rates. They think it is only a matter of a few months before rates are brought down to their 'appropriate' level. 

We have been tracking the market capitalization of ~3,000 US-listed common stocks, and their valuation is approaching $52T. This is pretty high. We have seen daily fluctuations of 4.5% this past week (see our webpage for details). This does not show up in the main indices, as those are designed to reduce volatility, but we see it in our detailed, comprehensive market data.

​Good luck to everyone in the markets.