Warns the investor about the rise in stock prices: – This is meaningless

After a broad rally on Monday, the leading stock market indexes fell on Tuesday:

• The S&P 500 index, which consists of 500 of the largest publicly traded companies in the United States, fell 1.16 percent.
• The Dow Jones Industrial Average, which consists of 30 handpicked stocks considered important, fell 1.02 percent.
• The Nasdaq Composite Index, which is dominated by technology companies, fell 1.14 percent

The interest rate on 10-year US government bonds is rising significantly to 4.2 percent, not far from the peak in October 2022. The interest rate is often cited as the most important interest rate in the world, as it is the reference point for interest rates and other financial figures. all over the world.

The ten-year real interest rate, which is the nominal ten-year interest rate minus expected annual inflation, is rising to 1.9 percent, the highest level since the 2008 financial crisis. Just two years ago, the real interest rate was negative one percent.

And a number of US banks fell by two to three percent, after rating agency Fitch warned that it may have to downgrade several banks, including giants such as JPMorgan Chase. Last week, Moody’s, another rating agency, downgraded ten small and medium-sized banks.

Dream scenario

In 2023, the US stock market is up about 17 percent, despite higher interest rates, the micro-banking crisis, and geopolitical uncertainty. Many are now warning of a price hike in the market, investor Peter Warren among them.

– It doesn’t make sense. It can do this if the future is completely rosy, with strong earnings growth, no war and no energy supply problems. China is also slowing down, but that doesn’t seem to mean anything for the stock market. Warren says this is worrying.

The former hedge fund manager has nearly 40 years of experience in the financial markets. He believes that stocks look too expensive compared to the return that can be obtained from virtually risk-free fixed-income investments, such as US government bonds.

– This is the dream position of everyone who wants a secure income. Now you can buy safe bonds and recoup a yield you could only dream of a short time ago. Warren says more and more analysts are now talking about the fact that the current share price can’t be sustained.

Warren points out that some safe, fixed-income securities give a better continuing return than stocks. This is very unusual, and was also pointed out by DN Terje Erikstad’s financial editor.

The market can be irrational, either in a downtrend or in an uptrend. Experience-wise, we haven’t gone through long periods of calm without something bad happening at some point. The Fallout Room is inconvenient, because once things go wrong here, things can go very wrong. Warren says there are many highly leveraged people out there, and suddenly the bank comes to the door.

The rise in stocks this year was largely explained by the euphoria associated with artificial intelligence, which mainly benefited companies such as Tesla, Nvidia, Microsoft and Apple.

Like Warren, Stein Brunn, chief economist at Arctic Securities, believes that US stocks are looking very expensive right now.

US stocks have historically high prices. At the same time, European stocks are historically underpriced, so investors can get a historically large discount on European stocks compared to US stocks, Brun told DN on Monday.

cut china

Tuesday’s drop in stocks follows a string of disappointing headline numbers from China, where both retail trade and industrial production disappointed significantly. Exports fell about 15 percent last month.

Just before the statistics were released, the central bank cut the 12-month lending rate for commercial banks (Medium-Term Lending Facility, MLF) by 15 basis points. This is an interest rate tool that controls liquidity, but it is also used to target individual sectors of the economy.

This is China’s fourth rate cut in this round.