May 20, 2020

The lower interest rates increase the investors horizon. Investors look past the near term, the lower the interest rate the longer the horizon. The lower the interest rate the larger the multiple applied to any change in expected earnings. Hence positive news on COVID19 and the economy will lead to large revaluation in asset prices while the negative news would produce the opposite result. Again, given the uncertainty, we should see a great deal of volatility surrounding the progress trendline as it processes new information. This is quite pertinent in this environment. The lower interest rate will contribute to an increase in market volatility. We contend that, starting from a relatively stable economic environment, an increase in uncertainty will have a large, and negative impact on investors’ horizons, which will, in turn, have a magnified negative impact on market valuation.

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