Sep 25, 2023 - Economy

Investors are starting to accept a new reality of higher rates, lower stocks

Change in the S&P 500 index
Data: FactSet; Chart: Thomas Oide/Axios

Investors are coming around to the idea that high-interest rates will stick around for longer than they previously thought — which helps explain the stock market's recent reversal.

Why it matters: As we've written about a ton over the past two years, rates play a huge, but often unseen role in determining stock market prices.

  • Long story short, when rates rise, they pull down the value of stocks in lots of investor models.
  • High rates make risk-free assets like Treasuries look a lot more attractive, relative to stocks — and that lures money out of the stock market.

What they're saying: "US equities [are] unlikely to reach new highs" any time soon, wrote JP Morgan analysts in a note last week, summarizing the common views expressed at a recent investment conference. They cited the increasing investor interest in "cash and high-yielding, high-quality short duration fixed income."

  • And BofA Global analysts, noting the large flow of money into short-term, cash-like investments, described investors as "cautious" and willing to be "paid to wait" in cash until the market decides its next move.

State of play: The Federal Reserve last week threw cold water on investor hopes that it'll cut rates any time soon.

  • In response, 10-year Treasury note yields jumped to a new 16-year high of nearly 4.50%.
  • And as you might expect, the S&P suffered. The blue-chip index tumbled 2.9% in its worst week since the failure of Silicon Valley Bank.
  • With one week left in September, the index is on track for its worst month of the year.

Zoom out: This year's once robust rally — which lots of people were saying had all the earmarks of a new bull market — has really lost momentum.

  • The S&P's yearly gains, which were flirting with 20% back in early August, are now down to 12.5%.

💭 Our thought bubble: If stocks keep stalling (or falling) investors may avail themselves of other attractive places to stash cash, while they wait for a good reason to take stock market risk.

The bottom line: As markets adjust to high rates, no one seems very confident in where the stock market goes from here.

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