Re:The ballooning money supply may be the key to unlocking i...
by AnimalMuppet on Tuesday October 13, 2020 @02:53PM
(#24768832)
I think a big part of the runup of stocks has been the low interest rates.
That is: I've got some money to invest. As far as rate of return goes, a stock at a P/E of 10 is about the same as a bond paying 10% interest. (Yes, the stock can go up in price. It can also go down. And so can the bond - when interest rates change, bond prices change. But stock prices factor in expectations of future earnings changes, which bond prices usually don't.)
Now bonds are only paying 4%. That stock P/E of 10 looks really good - so good that people keep buying it, and the price keeps going up, until the P/E is more like 25, which puts it back at approximately the same yield as bonds.
That is: I've got some money to invest. As far as rate of return goes, a stock at a P/E of 10 is about the same as a bond paying 10% interest. (Yes, the stock can go up in price. It can also go down. And so can the bond - when interest rates change, bond prices change. But stock prices factor in expectations of future earnings changes, which bond prices usually don't.)
Now bonds are only paying 4%. That stock P/E of 10 looks really good - so good that people keep buying it, and the price keeps going up, until the P/E is more like 25, which puts it back at approximately the same yield as bonds.