After the financial tsunami, interest rates in Europe and the United States remained low for a long time, but the stock market hit a record high.
Low interest rates seem to be the only guarantee to support stock prices, and that may not be the case.
Because although the interest rate was high in the 1990s, it did not hinder the strength of US stocks.
Although the end of the interest rate hike means that the central bank will be able to relieve the inflationary pressure that has been borne for more than a year, it also shows that the qualitative change of the economy after the epidemic will take on a completely new look.
The stock market may have already priced in the consequences of central banks' violent interest rate hikes, but as the end of rate hikes draws to a close, investors may still have to brace themselves.
EU stocks hit record highs amid low interest rates
After the financial tsunami, from December 2008 to December 2015, for seven years, the Federal Reserve (Fed) maintained the target range of the federal funds rate at the lowest level of 0-0.25%. During this period, the U.S. stock market was strong, with the Dow Jones Industrial Average roughly doubling. Afterwards, the Federal Reserve slowly adjusted interest rates. Although there were ups and downs during this period, the highs did not exceed 2.5% before a drastic rate hike in 2022.
Although the Dow Jones Industrial Index fell sharply in March 2020 due to the epidemic, it still stands at an all-time high of 36,000 in 2021.
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After the financial tsunami, Europe on the other side of the Atlantic encountered the European debt crisis again. The sovereign credit of Greece, Portugal, Spain and other countries plummeted, and their finances were in trouble. Cut the policy rate to a negative value and not start raising rates until July 2022 when inflation has started.
However, as in the U.S., stock markets across Europe hit record highs during the period of extremely low interest rates.
During the aforementioned stock market boom period, the European and American economies did not perform particularly well, but the flood of funds flowed into various assets. average short; for investors, low interest rates seem to be the only guarantee to support stock prices and house prices.
However, is this really the case?
Higher or lower interest rates have not hindered the strength of US stocks
Due to the experience of long-term low interest rates, even zero interest rates, and negative interest rates, many people forget that market interest rates have also soared.
Even if you don’t talk about the 20% interest rate in the two oil crises in the 1970s and 1980s, in fact, from 1990 to 2000 before the Internet bubble crisis, the US federal funds rate fluctuated around 5%, which is similar to the current level. In those 10 years, the U.S. stock market rose more than three times, even better than the 2008 financial tsunami stock market rose from the lowest point in the 10 years since then.
The high interest rates in the 1990s did not prevent the strength of US stocks.
In the two decades after 1990 and 2010, the U.S. stock market was extremely bullish and unprecedentedly prosperous; however, the policy rate of the former hovered around 5%, while the latter almost moved forward near zero. The economic growth rate of the former is mostly above 2.7%, while the growth rate of the latter is below 2.7% except for 2.9% in 2018.
Tight currency effects key after money party
We are easily limited by our recent experience, but judging from the above two periods of history, the performance of the financial market is not tied to a single factor. Interest rates and economic growth rates may affect asset prices. Of course, new technologies and productivity also have an impact force.
Maintaining interest rates at a high level does not mean that the stock market will fall; and when the central bank no longer raises policy interest rates or may cut interest rates, for investors, there may be funds that will no longer continue to tighten and relax, but it should not mean that they can sit back and relax.
For players, after the party is over, what awaits is the start of the next party.
However, whether the next party will be grand after cleaning up the messy cups and dishes, I am afraid that we must observe the extent of the economic damage after the tightening monetary policy is fully effective.
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