DE | Sinai Economic and Market Perspectives | Higher Interest Rates—Lower P/E Valuations? Economy Snapping Back Sooner, Stronger, So Higher Earnings – 03/11/21

Posted March 11, 2021 by Diane Buscemi

Higher Interest Rates—Lower P/E Valuations?
Economy Snapping Back Sooner, Stronger, So Higher Earnings
Allen Sinai and Rohan Kumar

“Bear” Fixed Income Market But Strong Economy and Strong
Earnings Spell Bull Equity Market New Highs

DE has called a “Bear Market” for Fixed Income, i.e., on average, irregularly so, rising long-term interest rates and then later rising short-term rates when the Federal Reserve eventually moves to less Ultra-Easy Monetary Policy.

This marks a new stage in the Business Cycle and a different backdrop for trading and asset allocations than seen in a long, long time (see Chart 1) when the economy was mostly growing, Equity Bull Markets were-in-place and interest rates generally declining, although with interruptions from time-to-time.

At the same time, what is driving the rise of interest rates is yes, massive fiscal stimulus and a flood of U.S. Treasury securities now and coming in the future, but also a much stronger economy, sooner than had been thought and the potentially surprisingly high earnings that can go with a higher growth path for economic activity and Nominal GDP.

This is not new in the Business Cycle, appearing every time as the economy goes through a Recovery and approaches the Expansion, this latter stage most of the time the longest portion of a Business Cycle upturn.

For years, the U.S. has experienced a Bull Equity Market with stable or falling interest rates and transitory interruptions (Chart 1). But now, interest rates are rising as the result of the economy picking up, prices firming, and massive deficit-financed and fully-accommodated fiscal stimulus. This is now a stage of rising stock prices and rising interest rates, very different from what appeared from 1990 to 2021 Q1.

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