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Minyan Mailbag: Like 1995?


Guynn to head? I'm puzzled


Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

I am seeing comments that the stock market should behave like it did in 1995 when the Fed finished raising rates. (That is, move straight up.)

However, in 1995 the long-bond was around 8.25% when the Fed finished, eventually coming down to around 6% by the end of 1995. This seems to be, in part, one of the reason stocks performed so well.

Is it safe to ignore this?

-Minyan Todd Horlbeck

The relationship between the time value of money and equity premia is far - FAR - more complicated than "well, this cycle is just like the 95 tightening cycle, therefore..." The impact of time preferences on interest rates is of course complex.

Do not fall into the praxeological trap that absolute rates of interest matter; it is relative changes in time preferences (time preferences determine interest rates) that matter. So we cannot state with much confidence at all what stock prices are going to do based on what the Fed does to interest rates on the short end or what the bond market itself does to interest rates all over the curve (if there was a relationship, you can bet that some fund or manager somewhere would have been able to model it and exploit the relationship. And I guarantee you would already know his name).

In short; every cycle is different: not on the margin but SUBSTANTIVELY so.

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