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What Just Changed?

The latest pullback in stocks

In the last few days stock prices have fallen modestly, with most of the damage in the types of stocks we own in our portfolios. The reason for this might be lurking in the following two charts. 

First is the cash money supply–checking accounts and currency. This is a 50 year chart showing that the current infusion of cash into the economy is unprecedented. And if President Biden gets his way there’s more to come and the trend is unlikely to change.

Ignoring for now the technicalities of how this cash is created, the next chart provides a much more direct explanation of the nervousness in the stock market. In the last 6 months the interest on 10 year treasury bonds has doubled, from .70% to 1.48%. Still low, but the latest move has come as a surprise to investors.

Stocks are worth less when interest rates are higher. Why that’s true might be best illustrated by thinking about house prices and mortgage rates. Houses are less valuable if mortgage money costs 7% instead of 2%. Buyers can afford to pay more for a house when low interest rates result in a lower monthly payment.

This relationship between interest rates and stock prices is roughly similar. The discussion in Washington about $4 trillion more in debt financed spending is driving interest rates higher and fears of inflation along with them.

The economy is in very good shape so it is unlikely that a bear market in stocks is developing. But higher interest rates will be a drag on stock prices. We will be monitoring the 10 year bond and keep you posted.

Best regards,

Daniel A. Ogden


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The latest pullback in stocks

In the last few days stock prices have fallen modestly, with most of the damage in the types of stocks we own in our portfolios. The reason for this might be lurking in the following two charts.

First is the cash money supply–checking accounts and currency. This is a 50 year chart showing that the current infusion of cash into the economy is unprecedented. And if President Biden gets his way there’s more to come and the trend is unlikely to change.

Ignoring for now the technicalities of how this cash is created, the next chart provides a much more direct explanation of the nervousness in the stock market. In the last 6 months the interest on 10 year treasury bonds has doubled, from .70% to 1.48%. Still low, but the latest move has come as a surprise to investors.

Stocks are worth less when interest rates are higher. Why that’s true might be best illustrated by thinking about house prices and mortgage rates. Houses are less valuable if mortgage money costs 7% instead of 2%. Buyers can afford to pay more for a house when low interest rates result in a lower monthly payment.

This relationship between interest rates and stock prices is roughly similar. The discussion in Washington about $4 trillion more in debt financed spending is driving interest rates higher and fears of inflation along with them.

The economy is in very good shape so it is unlikely that a bear market in stocks is developing. But higher interest rates will be a drag on stock prices. We will be monitoring the 10 year bond and keep you posted.

Best regards,

Daniel A. Ogden

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