This caused a huge bull market in stocks. Buffett pointed out that if you had invested $1 million in the Dow Jones in November 1981 and reinvested all the dividends, your portfolio would be worth roughly $20 million by the end of 1998. “The increase in stock value since 1981 surpasses anything you can find in history,” he wrote in 1999.
How picturesque. The Dow was just over 9,000 points at the time. It is now hovering above 35,000 – even after recent selling. That said, there is no indication that the crucial relationship between interest rates and equity valuations has broken since Buffett’s article was published. Quite the contrary.
In his January 2000 State of the Union address, Bill Clinton said, “We are entering the new century with over 20 million new jobs; fastest growing economy in over 30 years… [and] the first consecutive surpluses in 42 years. He was absolutely right.
The only problem was that it was also the start of the worst decade for the stock market in generations, as Fed interest rates, which had been cut to 0.75% after the dotcom bubble burst , slowly rose to 6.25% on the eve of the financial crisis.
In his January 2010 State of the Union Address, Barack Obama said, “One in ten Americans still can’t find a job. Many businesses have closed. Home values have gone down. Again, the President’s economic analysis was absolutely spot on.
But global stock markets were also bracing for a fierce bull on the back of the “zirp” – the zero interest rate policies pursued by global central banks to boost their economies.
It is axiomatic that higher interest rates are bad for stocks, but it is worth considering the root cause of this relationship. Of course, all sorts of other elements go into the valuation of individual stocks and the broader market. But interest rates are essentially the canvas on which the picture is painted.