Markets

Money is still cheap enough to support stocks

COSPV / Shutterstock
COSPV / Shutterstock

Recently, U.S. interest rates hit multi-year highs and the dollar came back from the dead. From the February low to Monday's high the DXY Dollar Index gained approximately 6.5%. At the same time, long-term U.S. interest rates are back to their early 2014 peak; two-year Treasury rates are at their highest level in roughly a decade. Together, higher rates and a dearer currency both represent a tightening of financial market conditions. Still, despite these developments stocks have bounced, with the S&P 500 up 5% from the May low. How is it that stocks are rallying despite tighter financial conditions? Strong earnings are part of the answer. But apart from a stellar earnings season, the simple truth: Financial conditions have actually become easier in recent weeks. According to two measures of financial conditions maintained by the Chicago and St. Louis Federal Reserve Banks, financial conditions have eased in recent weeks. There are three reasons financial conditions have actually gotten easier.

1. The dollar is still down year-over-year

Trade weight

2. Credit conditions remain benign

3. Equity volatility has fallen

The resilience of equities

Russ Russ Koesterich , CFA, is Portfolio Manager for BlackRock's Global Allocation team and is a regular contributor to The Blog .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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