The TINA Trade Examined

As I mentioned in a previous article, some investors believe low real interest rates mean equity multiples should be high because that's what happened in this cycle. However, usually the real rates being in the 2% to 5% range is the best because it implies economic growth is strong. Bond investors keying on the low rates in this cycle were misled as stocks increased steadily. The 10 year inflation indexed security, which we can use as a proxy for real rates, was in between 0% and 1% for most of this cycle. Real rates fell to the negatives from 2011-2013, but stocks still did well. Currently real rates are at 0.57%. To be clear high returns are not the same as high multiples. That wouldn't be the case during a recession where earnings fell a greater percentage than stocks.