Rate cut and stocks
Monetary accommodation is generally good for stocks. A cut in interest rates makes borrowing cheaper for households and businesses, pushing them to spend and invest. A rate cut is good for stocks because it allows companies to borrow money at lower interest rates and invest in new plants, machinery, or operation expansion, which may help future earnings. However, a rate cut does not benefit stocks moneylenders and insurers such as Principal Financial Group (PFG), Assurant (AIZ), and MetLife (MET), because their interest income falls.
Is the Fed inflating stock prices?
Richard Bernstein suggests that the overwhelming perception of a bear market being just around the corner has made many investors jittery. Investors with this view blame the Fed for the bull market. According to them, the extended monetary accommodation is only artificially inflating stock prices.
In his firm’s October newsletter, Bernstein indicates that this “rather obvious sentiment barometer” closely ties in with the bearish sentiment. Some investors are convinced that stock prices should have already corrected, but they haven’t. In fact, they continue to rise. As this leads them to believe that the Fed’s policies are aiding the rise, they blame the bank for the bull run.
To Bernstein, this situation is “unusual.” In the past, investors were thankful to the Fed for bull markets rather than blaming it. He added that “the constant negative consensus regarding equity returns suggests the current bull market could still have a considerably longer life than most investors expect.” In the next part of this series, we’ll discuss Bernstein’s explanation of the current bull market.