The Secret Sauce That’s Driving Market Returns

Published on: 08/26/2021

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo discuss what’s behind the rise in both the stock and housing markets.

TRANSCRIPT:

TONY:

Welcome to another edition of Chart Talk. I’m Tony Ogorek and I’m here with Portfolio Manager Jeff Viksjo, and today Jeff, we are going to be talking about the secret sauce behind the market’s ascendancy since the beginning of the pandemic, as well as, the fact that housing prices, apparently, are going through the roof.  So, let’s take a look at this chart, which is really a wonderful chart.  It goes back over 150 years and takes a look at stock market action, as well as, interest rates.  What do you see here Jeff?

JEFF:

So, couple lines on the chart, the blue line is showing stock valuations, so the price to earnings ratio.  How much you’re willing to pay for every dollar of earnings.  And then the red line is interest rates.  Where interest rates in terms of Government Bonds.  You can see they are negatively correlated.  So, the lower interest rates go, the higher stock valuations go because the incentive to be in bonds isn’t very high.  So where does that money go?  It goes to stocks.  Tony, interest rates have never been this low and that’s why we are sitting at all-time highs in stock valuations.

TONY:

Yea it’s really interesting Jeff, when you look at 1921, you’ll see the red line really is ticking up.  And as interest rates went up, you know what happened shortly thereafter, the market really took a dive.  And also, you know, in the late 70’s going up to 1981, interest rates went up the highest they’ve been in 150 years, and you’ll see that the market just crashed at that point. Today, really interesting, rates have never been as low, past 150 years, as they are today.  Which is really saying something, isn’t it?

JEFF:

Yea and we’re not showing housing prices on this chart, but it would show a similar story.  When interest rates are this low, the interest component of your mortgage payment is very small.  So, you can afford a lot more house for the same monthly payment.  So, you’re going to pay more for homes.

TONY:

Yea so the bottom line is, people are patting themselves on the back for being in the market.  Well there really haven’t been a whole lot of alternatives.  And if they’re patting themselves on the back saying ‘wow I own this house, look how much it’s gone up’.  It isn’t about you, it’s really about interest rates.  The fact that we’ve got lower interest rates then we’ve had over the past 150 years.  And as they say Jeff, the good times can’t be rolling forever.  That’s another topic for another Chart Talk. 

Thank you for joining us.  We look forward to seeing you on our next Chart Talk.

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