“Rising interest rates are bad news for shares, especially technology shares.” It was only six months ago when the world of technology stocks was reeling from their worst sell-off in a decade and investors were rudely awakened. Last year saw tech stocks being crushed, with the NASDAQ 100 taking a tumble of more than 30%. This came in the wake of the Federal Reserve's decision to increase interest rates from 0% to more than 5% In a little over 12 months, a shift that didn't exactly sing a sweet melody for long-duration assets like growth stocks. And yet, here we stand, in 2023, with the NASDAQ 100 recovering gloriously, up by more than 30%.Some attribute the tumultuous journey of tech stocks to fluctuations in interest rates, citing an inverse relationship between the two. In the 2010s and the early 2020s, rates were considerably low while tech stocks thrived. In these periods, it seemed that lower rates saw tech stocks flourishing, while higher rates conversely led to their downfall. But is this connection as straightforward as it seems?In light of the current scenario, where the Federal Reserve has increased rates to over 5% and possibly continues to tighten monetary policy even further, the revival of the NASDAQ 100 seems to at least cloud this theory. Does this mean that the easy money over the last few years had nothing to do with tech stock gains? I wouldn’t be so hasty to draw such a conclusion.It's evident that low rates were beneficial for long-duration assets. However, to say they were solely responsible for significant increases in tech companies, for instance, Apple’s growth from $170 billion to nearly $400 billion in sales within a decade, would be to overlook other important factors. The combination of continuous product innovation, particularly in the areas of smartphones and wearable technology, along with strong brand loyalty has propelled Apple. Such a position also discounts Apple’s strategic expansion into emerging markets, sound supply chain management, and effective marketing, all significantly contributing to its financial success. A similar story is playing out today with NVIDIA despite rapidly increasing rates, highlighting the current price movements, primarily due to AI involvement, aren’t directly related to interest rates.Interest rates undoubtedly play an essential role in the market and economic dynamics, but they don’t singularly dictate the direction of investment. Investors' fascination with tech stocks was significantly powered by the fundamental play of innovation, which now forms an indispensable part of our lives.
“High inflation and interest rates are bad for the share market.” We're in an era where many market pundits are pondering the possibility of a new economic regime, marked by higher rates and inflation. It’s a conceivable scenario. However, the assumption that such a shift would inevitably spell doom for the markets warrants further scrutiny. Between 1940-1979, a 40-year period of rising inflation and interest rates, the average annual return for the U.S. stock market was 10.3% p.a. I don’t know about you but I’m happy with double digits returns, independent of the market type. So does a regime of higher rates and inflation doesn't really spell doom and gloom for the stock market?In the 40-year falling inflation and interest rates era of 1980-2019, the return was 11.7% per annum. Yes, this represents a 1.4% p.a. outperformance during a period of falling inflation but it's hard to isolate if inflation is the only factor at play. Has the technology revolution witnessed over the last 40 years not had some impact on such returns?Yet, data can be sliced and spliced, which again highlights the importance of nuance. Over the past 94 years, the inflation rate has escalated 50 times and dwindled 44 times. The U.S. stock market has typically demonstrated better returns during years of lower inflation, averaging 14.3% p.a. when inflation decreases year over year compared to just 5.5% return when it increases. Even when the data clearly shows such a stark relationship, one must appreciate the nuances. This pattern isn’t set in stone, just as the relationship between tech stocks and interest rates isn't. Even if this relationship was foolproof, you must then assess your ability to get a reading on inflation before the market. While also acknowledging the occasional disconnect between rate rises and the direction of inflation, as we are currently witnessing.So what is the lesson?“The direction ofInflation over the long term has little impact on the returns of the U.S. stock market, but year on year shows a significant inverse return relationship.” Any hasty interpretation I attempt here will inevitably lack the depth and subtlety needed to truly grasp and utilize this insight.The aim of this article is not to provide a definitive playbook on how to invest in 2023, but rather to question all that do. The ‘conventional wisdom of investing’, especially when it's served in a neatly packaged sentence, misses the nuance required to make you a successful investor.The issue with drawing conclusions from lessons not fully taught is that you might end up like a chef who started an incomplete recipe, without a cook time it’s easy to end up with the kitchen on fire!I’ll end with a lesson about investing. Yes, it's overly concise, simplified to a fault, and void of practical guidelines. Still, I urge you to spare a moment to untangle its complexities.It's worth remembering that while adversity strikes from time to time, most often, things work out, and if they truly don't, your portfolio positioning won't make much of a difference. So while we can try to predict and prepare for future crises, recessions, or market crashes, we should refrain from adopting a pessimistic view just because we can't achieve perfection.Despite all its imperfections and challenges, 'things don’t always work out, but most of the time they do' is a good mantra to invest by. After all, isn't the primary motive for investing a belief that things will improve in the future? So, instead of betting against the resilience of markets and economies, let's foster faith in the dynamic interplay of the share market, interest rates, and the economy. We may yet be surprised by the resilience and potential that they collectively hold for the future, as we have been in the past.
