Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
US interest rates: Will they, won't they... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 26, 2004

    US interest rates: Will they, won't they...

    American consumer, one of the key drivers of the global economy, has had an excellent run in recent times. Buoyed by one of the lowest interest rates in about four decades, he went about splurging and in the process drove the GDP of his nation to two successive quarters of record growth. Assets like stocks and houses also witnessed a lot of appreciation during the same period as liquidity created due to low interest rates and robust growth in GDP made investors turn towards these investment avenues. The fact that the stock markets were languishing at lower levels and there were a lot of value buys also helped.

    However, investors have a tendency to overdo things and rampant buying in the above mentioned assets have raised fears of another bubble as these avenues have already started looking overvalued. Infact, since the beginning of the year, the benchmark indices like the S&P 500 and the NASDAQ have already corrected by almost 5% and 10% respectively from the highs they reached in mid January. It is therefore being feared that such profligacy if not stopped, would ultimately lead to the bursting of the bubble and would plunge the country into recession.

    Lower interest rates prevailing in the US markets is said to be one of the primary reason behind the current state of affairs. While the rates were essentially lowered to avoid the country from heading into recession a couple of years ago, the objective seems to be more than achieved as consumer demand has been pretty robust. But if more and more capital continues to be pumped into the system, law of diminishing returns, whereby the output grows at a slower pace is likely to set in, which would eventually retard growth and drive prices up, thus leading to inflation. However there seem to be no such worries currently on the inflation front. While inflation in the US markets is hovering at comfortable levels of 1%, asset markets such as stocks and real estate are sucking up the excess capital, thus leading to unsustainable price rises.

    One of the primary ways in which this could be avoided is to raise the interest rates and thus slow down consumer demand and also force investor investment into less riskier securities such as longer-term bonds and other similar securities. Therefore, when the Fed decided to maintain the status quo on interest rates in its meeting earlier this month, eyebrows were raised and it was being felt that a rise in rates would have been a better option. However, there was a different factor at play here and this had to do with the fact that the growth in employment has been sluggish in the US economy. Owing to gains in productivity and outsourcing of jobs, employee demand has failed to pick up and if Fed were to raise rates further, there are fears that slowdown in fresh investments would further dim job growth prospects. And with elections round the corner, such a course of action would be detriment to the prospects of the incumbent government.

    The Fed thus seems to be stuck in a catch-22 situation. However, it is common knowledge that decisions, which are in the long-term interest of the country, have to be given precedence over the ones, which alleviate the short-term pain. But the Fed seems to have digressed from this notion if its latest move is indication. Considering the fact that the Fed diktat has global implications, it won't be long before sanity prevails.

    With increasing integration of India with the global markets, any such decision is likely to have an impact on the Indian markets as well. While the appreciation in the Indian stock markets did have a fundamental feel to it, one cannot ignore the role Foreign Institutional Investors (FIIs) have played in helping the indices scale new heights. Taking advantage of the interest rate arbitrage, these institutions have pumped money into the Indian markets and will continue to do so as long the spread is comfortably high. But once rates start rising in the US markets (thus making US assets more attractive), a stock market which still accounts for only 0.8% of the total market cap of all the major indices in the world is likely to drop faster from the good books of these FIIs and this might result in a rapid fall in stock prices.

    Therefore, an average investor has to have this in mind and make his investment decisions accordingly. As the Indian economy gets further integrated with the global economy, movement in US interest rates will start playing a major role in the movement of the Indian economy and consequently the Indian stock markets. Instead of getting swayed away by speculation, he should see whether the valuations look stretched from a medium term perspective and invest in only those companies that have a sound business model and management with a proven track record.



    Equitymaster requests your view! Post a comment on "US interest rates: Will they, won't they...". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)