Shocking- wetin dey behind di sudden rise for interest rates over di past few weeks

Donald Trump landslide victory don spark sharp jump for stock prices, and don release wave of optimism say big cap equities, afta dem don already post plenty gains dis year, fit continue to dey push to new highs.

For di nine days wey follow di election, di 500 surge over di 4% to take notch all-time record close of 5949 on Thursday, November 14.

Even afta di big drop to end di week, di big cap index still dey up over 3% since Trump secure him overwhelming win.

Di business press dey buzz over Wall Street great expectations for di Trump agenda wey don incorporate pro-business proposals like slashing di corporate income tax and dey foster ramp for energy production.

On November 18, front page headline for di Wall Street Journal trumpet talk say “Investors dey Bet on Market Melt-Up.”

Di story relate say money dey pour into equity funds for rate wey dem rarely witness since di onset of di Great Financial Crisis.

But di media and di average folks and money-manager whales wey dey wager for flush times ahead dey miss di big story as dem dey overlooked.

Di shocking, sudden rise for inside di interest rates.

Dis explosive shift, for di wrong direction, for crucial long-term driver of stock returns dey send exactly di opposite message from di jubilation wey dey spread by di prospects for di Trump second term.

As Warren Buffett don warn time and time again, bonds dey compete with stocks for investors’ money, and wen super-safe fixed-income dey provide puny yields, stocks, based on fundamentals, fit dey  plenty.

Well, bonds don become far more lucrative overnight, for some worrisome and potentially reasons, and di outlook for equities just become worse.

But for now, animal spirits don dey swamp di bedrock basics wey, over time, inevitably guide valuations.

Di 10-year just take one of di biggest quick leaps for history

Dad omen for stocks for October 1, di rate on di 10-year treasury bond, di fixed-income benchmark wey exert di strongest influence on equity valuations, stand at highly-favorable 3.74%.

Di rate don drop steadily from over 4.64% at di close of May.

Expectations say yields go remain extremely modest well into di future keep di powerful rally in stocks on track.

Then, dat balmy trend turn stormy. By Monday, November 18, di 10-year yield don vault to 4.47%, stunning increase of 73 basis points for just over six weeks.

Big part of dat jump happen following di Election Day.

Di increase come in two parts: di rise inside di “inflation premium,” and waxing “real yield.” Neither one dey good for stocks.

Di “inflation premium” dey measure investors’ expectations for average yearly increases in di CPI over di next decade.

Dat component rise from 2.19% to 2.33% since di start of October.

Takeaway: Investors dey fret say di Fed restrictive policies go take long time to wrestle inflation to dia 2% target, and fit even fall short.

for any event, di rise for di inflation premium signal say di central bank fit need to hold short-term rates high for extended period.

And any sign say di Fed go remain tighter, for longer, na curse for equities.

Di second part, di upward trend in di “real yield,” account for much bigger share of di total rise, swell from 1.56% to 2.15% and contribute 59 points of di 74 bps total increase.

Dat one dey even darker warning than di prospect inflation fit prove stickier than anticipated.

Na di “real” number dey exercise gravitational pull over equity valuations.

Di inflation-adjusted yield reign as di so-called discount rate wey dem apply to company expected flow of future earnings to determine its “present value.”

Na staple tenet of financial analysis: Di higher di discount rate, di lower di value of dose profits wey dey loom over di horizon, and hence di less you suppose dey pay for di stock.

But di real yield steep ascent no hammer di share prices.

In fact, di markets just keep dey hum as November 5th dey approach, then take another leg up wen Trump prove victorious.

Di rub: Na extremely low real rates don supply di biggest tailwind to two-decade-old bull market.

From 2014 to 2022, inflation-adjusted yields average extraordinarily favorable 0.8%.

Di market clearly buy di view say di real rate go stay low for years to come, justifying high PE multiples.

As of November 18, di PE on di 500 stand at 29.4, based on di trailing four quarters of GAAP reported earnings.

Dat’s number you go seldom hear from Wall Street, and na di biggest since di tech bubble end for 2002, except for brief periods during di Great Financial Crisis and Covid-19 outbreak wia earnings collapse, artificially inflate multiples.

Dose sumptuous valuations, wetin edge stocks offer over bonds?

Di expected return on equities na di inverse of dat 29.4 PE, or 3.4%.

Di expected real return on di 10-year na dat real yield of 2.15%.

Hence, stocks, di high-risk, volatile choice, especially at these prices, dey posit measly spread of 1.25 points versus di super-reliable treasury bond.

Compare dat narrow margin with di over three times bigger, 4.4 point cushion wey equities enjoy for mid-2021, wen di real rate dey negative 0.3%, and di S&P PE hover at 24.6, relative bargain compared to its current level of nearly 30.

Of course, di bulls go argue say explosion in earnings, courtesy of di Trump deregulatory and tax-lowering program, go keep propelling di markets.

Di math expose dat outlook as highly unlikely. Profits don already stagnate following bubble wey grow between 2016 and 2021, wen S&P earnings-per-share explode 110%.

For di past 11 quarters, EPS don rise only 2% overall, number wey trail inflation by wide margin.

Di big question na whether di leap in di real rate represent structural shift or mere blip wey fit reverse as fast as e ramp. We no know di answer.

But e highly possible say di current nearly 4.5% nominal yield on di 10-year, and well over 2% real rate, go stay in dose ranges for simple reason.

Investors dey increasingly worried about gigantic budget deficits wey dey exceed 6% of GDP wey fit only get worse if Trump deliver on him pledge to radically slash taxes.

All we know na say di one force wey more than any other don boost stock prices over di last decade or more, extremely low interest rates, just do astounding about face.

Di safest part of di market, U.S. treasuries, offer no competition for stocks for many years.

Dat scenario don totally change. Maybe dat’s one reason Buffett dey lighten up on equities and dey buy U.S. government bonds. Hope not math dey now drive di markets. And in di end, na di math dey always win.

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