The Dow and the S&P 500 both hit records today. Analysts credit low interest rates and the likeliness of continued low interest rates for the continued rally. USA Today notes that:
“You clearly have momentum favoring stocks right now,” said Russ Koesterich, chief investment strategist at Blackrock. “You have a persistence of low interest rates and, if anything, long-term rates continue to grind lower in most parts of the world.”
Asian stocks rose Monday after China’s central bank unexpectedly cut interest rates late Friday, as investors looked ahead to European inflation data due out this week and Thursday’s OPEC meeting to discuss oil production levels.
Japan, China and the EU are likely to keep interest rates low for quite some time to come, which has continued to energize investors. Our question is how low will stocks rise based on low interest rates? Every rally comes to a point where momentum carries it beyond what the fundamentals will support. At that point technical analysis guides trades in deciding when to stay in and when to get out or sell short.
Trading Foreign Stocks
How long will stocks go up based on low interest rates? They may rise longer in Asia and Europe than in the USA. The fact is that the USA had a more effective plan for dealing with the recession. The bond buying stimulus program of the US Federal Reserve was successful in helping avert another Great Depression. China, Japan and the EU are getting on board but much later. Asian shares rose recently as China announced interest rate decreases. Europe likewise will see stocks go up as the European Central bank lowers rates. This will make foreign stocks more likely to go up than US stocks where the Fed is likely to raise rates this next year. The Wall Street Journal wrote about how stock investors could benefit from staying engaged in foreign markets.
Foreign stocks are in the red this year, even after a rally on Friday, while U.S. indexes set record after record. Japan is in recession, Europe is stagnating and the dollar is booming.
There are plenty of reasons for U.S. investors to hold foreign stocks. The People’s Bank of China and European Central Bank President Mario Draghi both made potentially bullish moves this week for investors in those markets.
More broadly, foreign stocks can be an effective hedge against a rise in U.S. interest rates.
As things have gotten worse in foreign markets a lot of money has moved to the USA. The result has been a booming US stock market and the likelihood of higher US interest rates. The old blood in the streets rule of investing comes to mind here. When things look their worst, it is time to invest. This may soon be the case with offshore stocks. How long will stocks rise based on low interest rates in the USA? They will probably rise until the Fed raises rates.
The Contrarian View
It is never really clear what the Chinese intend to do. Stocks went up in Asia and especially in China as the central bank lowered rates. But, do they have what it takes to carry out a sustained stimulus program? A contrarian view is voiced in the Wall Street Journal which notes that effects of the Central Bank rate cut may temporary.
China’s move to slash lending rates to address slowing economic growth may lack punch as banks likely will hesitate to lower the cost of loans for fear of hurting their profits.
As always one can only speculate on how long stocks will rise based on low interest rates and in fact how long rates will stay low.
Popularity: 1% [?]