What happens when interest rates climb and corporations stop or slow buying back their own stock? Both will happen but when?
https://apple.news/A-xDIfQjlTdu2muQWDiQhwg
pfo said:
In the long run stock prices are determined by earnings and stock purchaser's perceptions of future earnings and dividends as discounted by Net Present Value calculations which are a function of interest rates/cost to borrow money. In 2018 the S&P increased in earnings approximately 22% over 2017 driven by tax cuts, regulations cuts and the booming Trump economy. For 2019, S&P earnings are projected to rise 12%. The S&P forward PE is approximately 17. Is that high? Probably a little high but your alternatives are cash which pays about 1%, bonds which pay about 3% and go down in value with each interest rate hike, real estate but that's not cheap and it comes with property taxes, minerals if you can find them, gold which pays nothing and whatever else you can think of.
But if interest rates eventually climb to 10% (nothing anyone expects) then stocks would be ridiculously overpriced. The NPV if their future earnings would be less and risk free 8% plus returns would be an alternative.
Corporate buybacks are good for shareholders because they bring shareholders value without taxation. Are corporate buybacks responsible for higher stock prices in the short term? Partially, yes. The Trump tax discount for repatriation of foreign earnings has brought a lot of cash back to American companies with big international footprints.
pfo said:
I don't see a recession unless democrats win big in the midterms or the Fed keeps raising interest rates a lot further but I agree that market PE's are going to contract. Going from 22% to 12% earnings and rising interest rates will contract multiples. I'm expecting the correction to continue but will put cash to work if the market gets hit another 8-9% or so. I hope the Fed doesn't kill our economy! I'm not so sure they won't.
pfo said:
I hope the Fed doesn't kill our economy! I'm not so sure they won't.
Scientific said:pfo said:
I hope the Fed doesn't kill our economy! I'm not so sure they won't.
I hear different opinions on the fed. It sounds like it's damned if they do damned if they don't. If emerging markets crash, the fed won't have room to ease rates. At some point they were going to be raised.