Keep Your Eye on Real Rates

From John Melloy at CNBC:

The bears believe that low interest rates have been the primary driver of this bull, allowing companies to borrow cheaply to buy back their own stock and making ballooning multiples acceptable on a relative basis. Now that the Fed is in an interest rate hiking cycle, with moves to shrink its balance sheet likely on the horizon, the bears believe the run fueled by cheap money is over.

But Eddy Elfenbein, manager of the AdvisorShares Focused Equity ETF, points out that real rates (interest rates minus inflation) are still low.

The “median Fed member sees the range for fed funds rates to be 2 percent to 2.25 percent by the end of 2018,” said Elfenbein citing the latest Fed “dot plot” data. “They also see inflation at 2 percent. That means real rates will remain negative (and next to negative) for nearly two more years.”

“That’s the strongest point in the bulls favor,” he said.

Posted by on March 21st, 2017 at 12:28 pm


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