Equities are flat for the year again, but up until the last couple of days, the market had been staging a small rally. One of the primary reasons for the rally was that investors became increasingly convinced that the Fed would keep interest rates low for a very long time. At the S&P 500′s peak, the market appeared to be accepting that growth would be slow, but there would be little volatility because the Fed stood ready to support the economy and markets with low rates.
The focus of the market has changed since then, so this post may be a little stale, but I did want to point out that low rates are probably not enough by themselves to prevent volatility in stock prices.
The Nikkei 225 is evidence that stock prices can fall even in a low interest rate environment. The Japanese lowered interest rates below 1% back in 1995 and the Nikkei hasn’t gone much of anywhere since. There has been plenty of volatility along the way. In an average year, the Nikkei’s low point has been 17% below where it started the year.
Low rates haven’t been enough to prevent volatility in Japan’s economy either. Japan has experienced five recessions since 1995 compared to only two in the US.
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