Stock Markets Still Looking for Interest Rate Clues

By: Richard_Cox

By nearly all accounts, stock markets have had trouble gaining momentum over the last year.  The S&P 500 is now trading just 0.6% higher for the period -- and while this might seem modestly positive it does not say much for what is essentially a multi-year bull run in the equities space.  There are a few different schools arguing for why exactly this is happening but no matter which view you take, nearly every investor is looking for new clues in what is likely to happen in global interest rate changes.

Chart View:  S&P 500

In most years,  the economic data itself tends to be the best indicator of what most central banks are likely to do with respect increase in base interest rate policies.  But with the volatility markets have seen over the last few years, central banks are weary of disrupting stock markets in ways that surprise traditional investors and generate negative financial news headlines.

Watching the Lending Sector

So when we are looking for clues that the underlying economy is ready to sustain higher interest rates, it is a good idea to identify individual sectors that are most likely to be impacted by the changes.  The lending sector is a clear choice here but market analysts can take this a step further by looking for major developments in the peer-to-peer lending industry, which tends to work as a precursor for market changes in the majority interest rate perspective. 

The biggest names here include companies like Lending Club (NYSE: LC), Upstart and Prospect but since not all of these are publicly traded stocks, it is a good idea to research peer-to-peer lending reviews for investors.  This will give investors a better idea of which types of consumer loans are performing best, and there is ultimately no better way of understanding which types of consumer demographics are performing best in any given environment.  For example, Lending Club tends to offer the strongest returns on loans that are geared toward high-risk borrowers and much lower returns for low-risk borrowers. 

Trends like these have very clear implications for the economy as a whole, and this is an excellent way of determining whether or not the broad consumer base is actually capable of sustaining the credit costs that are associated with higher interest rates.  Of course, this is one of the best indicators of whether or not stocks will be able to initiate another yearly rally in 2016 -- so this is an area that should be on the radar of every investor.

By Richard Cox

© 2015 Richard Cox - All Rights Reserved

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