Stocks are boring again — and that's good news
We've reverted to normal, and, all things considered, it's not so bad.
Why it matters: For the first time in well over a decade, it's hard to look at the stock market and declare that it's being artificially boosted by ultra-low interest rates.
- Now that rates are positive and are expected to continue to rise, some of the most high-flying stocks have fallen sharply to earth. But the stock market as a whole looks remarkably healthy.
The big picture: The S&P 500 is having a bad morning on Thursday, bringing it to a level roughly 13% below the all-time high seen in January. But it's still up 25% from the pre-pandemic high, and up 270% from the 2007 pre-financial crisis high point.
- For substantially all of that time, the long bull market in stocks could be explained by extraordinary action from the world's central banks, which drove interest rates to zero and promised to keep them there to counteract the effects first of the global financial crisis, and then of the COVID-19 pandemic.
- No longer is that the case: The market is pricing in overnight rates at 2.8% by the end of this year. Long-term real rates are also normalizing: The 10-year Treasury bond hit 3% this week, and a 30-year mortgage is likely to cost you 5.5% at this point.
Between the lines: Higher interest rates mean that far-away profits are worth much less than they were just a few months ago. More generally, they also tend to tame animal spirits and reduce risk appetite. (There's less incentive to swing for the fences if you can't get a guaranteed risk-free return.)
- Investment strategies have moved from "get rich quick" to "get rich slowly." Retail investors aren't panicking and pulling their funds out of the market; they're just less enthusiastic about meme stocks and NFTs. (Robinhood's equities volume was just $36 million in the first quarter of 2022, down from $133 million a year previously.)
- Value investors are beginning to wake up: Berkshire Hathaway spent $51 billion buying stocks in the first quarter.
By the numbers: It turns out that both markets and the economy are surprisingly robust in the face of interest rate shocks. Stocks continue to trade at a healthy valuation of 17.7 times earnings, above the "fairly valued" benchmark of 15 times, while the labor market is still extraordinarily tight.
The bottom line: The markets seem to be pricing in a soft landing — one where the economy remains strong, while stocks revert to being a vehicle for long-term savings rather than short-term speculation. That's a huge vote of confidence in Jay Powell's Federal Reserve.