Much is currently being hypothesized about interest rates going forward. Not about higher or lower, but the amount of cuts and how long it will take to get to a neutral rate.
That being said, if rates were to drop by 2% over the next year, and all else being equal, maening no black swan events or a deep recession, to name a couple, what correlation would you assign to stocks which have been beaten up during the 4.75% increase to the BOC rate? A 2% cut in rates is a 40% reduction, in the rate.
I assume that with falling interest rates, money would flow back from savings accounts, GIC's and the like. Stocks like BCE, T, ENB and the banks and utilities or any that are currently yielding >4% should see some attention, no?
Thoughts?
Thanks,
Kelly
This exercise is quite difficult. While it is fairly easy to determine a bond or bond fund's move on interest rates (based on its maturity/duration) with stocks it is much harder because of corporate earnings and other factors. But, certainly, if rates fall further dividend stocks should see quite the benefit. Smaller, leveraged companies will likely move more as investors get more comfortable and if a recession comes off the table as a possibility. Much is going to depend, though. If investors worry about the economy still then some utilities stocks and telcos may do better (FTS, BCE, for example). But...if investors become much more confident and greedy growth stocks might still do better than dividend stocks, on average. For correlation, we might 'guestimate' that a 40% reduction in rates should result in 20% gains for the average large cap dividend stock, all else being equal (which is a huge assumption, of course).