2040...Wait...What?!
1.) 2040 – Could we really be in a new regime for interest rates? An average of the past suggests, maybe. And if history holds true, that could take us into 2040 for a rising rate regime. Of course, an average only tells us what happened before. It doesn’t tell us exactly what happens next.
But it does raise the question…what if the low interest rates so many people are waiting for don’t come back anytime soon?
An interest rate is just the cost of money. For roughly 40 years, beginning in the early 1980s, the broad direction for interest rates was down. There were plenty of increases along the way, but borrowing generally became cheaper over time.
Forty years is a long time!
That’s enough time for you to start a career, raise a family, and retire. Many have done this and been in a declining rate environment the whole time.
After a while, it’s easy to assume that’s just how the world works...
Rates go up for a little while
something breaks
rates come back down.
And that may still be the case. But, maybe that 40-year stretch ended. Maybe we’re now living through a cycle that runs in the other direction.
And it may just be, as Zachariah has pointed out, that it’s due to this massive demand for capital.
Regardless, we have to remember that if the regime has shifted to an upward bias that rates can still fall for months, even years, within a much longer rising trend.
It’s also important to remember that a Fed rate cut…should it come again…doesn’t guarantee cheaper mortgages, or cheaper corporate borrowing.
Companies can still grow, and make money in a rising rate market and reward their shareholders. But it can certainly put pressure on companies that don’t have sufficient cash flows.
Will the chart below prove to be true? I have no idea. But the bond market has been revolting against irresponsible gov’t spending that has created deficits as far as the eye can see.
Meanwhile, public borrowing is competing against private borrowing where the cost of money isn’t as important. Regardless, this makes a solid investment selection process even more valuable.
2.) US DOLLAR – The Dollar’s strength does not look to be waning. That breakout that occurred last week is exhibiting some serious strength. Last week I suggested that if the DXY (Dollar Index) was to turn and correct, that it was at or near that spot. Well that was wrong as the breakout was significant and put the momentum players in control and, for now at least, are pushing it higher. Yes, it’s overbought, but things can remain overbought for some time. Currently, the S&P 500 and Bitcoin have positive correlations with the US Dollar on a 15 and 30 day basis. That means that as the Dollar goes up, it tends to help those two asset classes. The next area of resistance for the Dollar isn’t until about $104.75
3.) BREADTH – Yep…participation in the market still stinks.
The S&P 500’s breadth figures continue to deteriorate with 80% of S&P 500 stocks now down -10% or more from their 52wk highs. Moreover 40% of the stocks are down -20% or more.
The stocks that have resumed leadership? The biggest of the big – Mag 7 names.
That helps the S&P 500 in a considerable way since it is a price weighted index – higher priced stocks have more weight in the index.
Keeping an eye on the flows of those big names will be valuable as we work through Q4 and into Q1, 2027.
