The Math of Equity Equation

The Math of Equity Equation

April 23, 2021
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The Math of Equity Equation

It has been very apparent that even with interest rates being so low, even with a slight rise, equities are affected. The Nasdaq fell in February and March. The primary catalyst was a backup in the 10-Year Treasury yield by about half a point. It has now stabilized, but what if the rate went up 2%?

Here is the equation for rising rates.

                                      Rising Rates = Growth Stocks” off”+ Value Stocks “On.”

This centers around interest rate sensitivity. The NASDAQ is loaded with a ton of companies that promise distant profits. With its current trailing P/E of 73 and a forward P/E of 34, a sudden spike in rates catalyzes the net present value math on its components to morph into a pot of gold.

What is interesting about all this is that the S&P 500 Value Index did not sell-off. Value stocks were so down and out over the last generation that rising rates breathe new life into them. Once the market digests these new rates, goes on the refrain, the NASDAQ can continue with its raging Bull market once more.

This is why a balanced portfolio growth/value is a tried and true practice for asset allocation. No one can time or predict a market, so proper diversification always wins.

Bill