Everyone knew it had to happen sometime. Stock indexes couldn’t keep rising steadily without a significant decline. Many of the recent runs of extended periods without declines finally ended with Friday’s close. Even so, despite the large point decline on the Dow of more than 600 points, in context the decline isn’t much, only a 2.2% decline. The decline for the week was 3.85% for the S&P 500.
The fundamentals for the economy are very strong, and earnings from most companies are beating estimates. Interest rates are the factor to worry about. They rose sharply over the last month, without new efforts by the Fed to boost them. Investors finally are noticing that inflation is rising and fear it will rise even more. That causes htem to sell bonds nad increase interest rates. This is likely a normal correction, but I’ll keep watching the factors that matter to the markets for signs that it might develop into something more.
“What is says, in general, is that higher interest rates make stocks look more expensive, especially relative to a fixed-income alternative,” said Tim Ghriskey, managing director at Solaris Asset Management. “Once yields rise to a certain level, stock investors begin to get attracted to low-risk bond yields instead of higher-volatility stock investments, and contributing to that are equity valuations above historic averages.”
Interest rates are among many factors affecting the stock market, and optimism over economic growth and accelerating corporate earnings growth may outweigh concern about rising yields, especially now, when they’re still low on a historical basis.