No. of Recommendations: 5
Thank you for your post, but I feel a bit confused by the tone/direction?
I meant it only in this sense of elaborating on the meaning of one word:
My first post noted how it seemed remarkable how much of the price movement in UK REITs in the last few years seems to be explained by recent movements in government bond rates, rather than (say) expected trouble in the sector.
You commented that this was "normal".
I replied that it's yes, it's "normal" in that it happens often and therefore not that surprising, but not at all normal in terms of making economic sense, which it doesn't.
In a sensible world the likely future real return from a company are what should determine its price today, not prevailing interest rates. That's because the prevailing interest rates on the day of purchase have pretty much zero correlation with the long run returns from equities. Someone thinking stocks are worth more because of low interest rates, or vice versa, is a fool. It's reasonable to expect short term equity *prices* to change with interest rates, but it's not reasonable to expect equity *values* to change, nor by extension to expect long run forward equity returns to change.
As noted by a favourite paper of mine by AQR, "The Fed model, alone or modified for volatility, offers no solace to those buying the S&P 500 at a P/E of 44, but it does explain what tricked them into doing so". (from "Fight the Fed Model", an article from 2003, the Fed model being the false notion that prevailing US bond yields drive the value of the US stock market)
Jim
