Thursday, October 29, 2015

An ugly projection for the stock market

Mr. Tan,
What is the likely impact of a hike in the US Fed Funds rate on the stock market?

My comment applies to the US stock market. The stock markets in other countries will be affected but not to the same extent.

The interest rate in US is extremely low. When the interest rate is increased, the impact on the stock market will be negative.

The 20 year treasury bond now yields 2.5%. When the US increases the interest rate, I expect that the yield will increase to 4%. This will probably occur over a period of two years, rather than immediately.

When the 20 year treasury yield increases from 2.5% to 4%, the stock market is expected to fall by 35%. that is a large fall.

The actual fall will be less, if the earnings of the companies increase. it will be higher if the earnings fall.

I expect the earnings to fall. The current corporate earnings is inflated due to low interest rate. When interest rate increases, the earnings will fall. I expect the total fall of the stock market in the US to be 50%! Is this scary?

The Singapore stock market will fall, but not to the same extent. the PE ratio of our market is lower than the US market. Maybe, our stock market can fall 30%. That would be ugly still.

My prediction may be too extreme. Maybe, it will not be so bad. But it could be a "worse case scenario".

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