Hey Friends. I hope you are well!

There are a number of reasons why the current stock market is perhaps more sensitive (vulnerable) to interest rates than perhaps any other stock market we’ve known previously. Just over a week ago, we all witnessed how rapidly the tech-heavy Nasdaq Composite Index dropped due to the rise in treasury yields. This week saw the yields settle and the stock market, including tech, rebounded significantly.

So, what makes this stock market so vulnerable to any hint of interest rate movement and, especially, to rising yields?

In my view, here are but several of the likely reasons:

  • the national debt is racing toward the 30 trillion level, recently surpassing the 28 trillion mark. Go here to check out the situation.
  • a new massive 1.9 trillion stimulus, adding to the debt load
  • interest rates are near zero and masking the threat the runaway debt poses
  • the nil interest rate makes fixed income investments unattractive — a rising rate would change that
  • the market has been in a bull mode for years and in no small part due to stagnant, historically low interest rates

There is the argument that a rebounding economy (from opening up more and more from COVID closure(s) coupled with massive stimulus) can withstand some inflation that would be reflected in rising interest rates. Go here to read one such commentary. Yet, this commentary notes that if growth slows in 2022, the market will likely react aggressively (negatively) to rising interest rates.

We all know that continuous stimulus is unsustainable; and that the virus’s direction is uncertain even with vaccines now available. We don’t know the viral variants that may crop up. So, the anticipation of refueled economic growth has a window of opportunity for the stock market but one that is uncertain in duration and intensity — and, in my thinking, the uncertainty is more pronounced because stock prices are already factoring in strong growth as evidenced by P/Es. This is most true in the tech world and thus the pointed fallout of a couple of weeks ago in that sector from recent yield spikes should surprise no one.

The moral to all this remains the same. Be selective and manage risk. The only financial report for risk assessment is the balance sheet. The income report and cash flow report reflect earnings and cash flows, respectively for a certain period of time. The balance sheet is a report of financial standing. I don’t know about you, but my money needs to be in a company standing on a solid financial foundation that has a business at least as valuable as the stock price implies.

If you haven’t before, check out my book, Choose Stocks Wisely, for an explanation of how to go about interpreting and assessing balance sheet accounts and numbers.

See you next time.