Yesterday I asked you to

“…imagine what would happen to the price of stocks when the discount models that justify their valuations have to factor in an interest rate above zero! Although, inflation (particularly in a massive debt environment) by itself — without regard to Fed rate policy — could easily do the trick.”

Well, the Bank for International Settlements’ analyzed the impact of interest rates on stock prices amid this year’s rally off the March lows (excerpt below), and, well, per yesterday’s charts — and the prospects for a bit of inflation going forward — suffice to say that risk remains (to put it mildly) elevated right here…

“…the drop in interest rates has provided a significant boost to stock prices. Most gains were concentrated in the long-term components, which are naturally more sensitive to discount rate changes than their short-term counterparts. All else equal, in the absence of the fall in interest rates, the long-term components of US and European stock prices would have been roughly 18% and 6% lower than they were on 4 September, respectively.”

“The estimated total impact – equal to the weighted average of the short- and long-term components – amounts to close to a half and a fifth of the rebound in the US and euro area equity prices, respectively.”

As a premature heads up (you clients out there), here’s the heads up I sent to the PWA team this morning:

“Hey team, just FYI, per the BIS’s quarterly review (highlighted in our “quote of the day”), literally half of the rally off of the March low is attributable to falling interest rates. In general, I tend to agree…

Looking at where rates sit currently, and what’s to come in terms of fiscal stimulus… rates prospects will no doubt at some point become a real headwind… (at best mitigating some of the upside from stimulus):

We’ve a ways to go before anybody will be fearing higher inflation and interest rates, but just a heads up, it’s likely that we’ll be rotating a bit more away from utilities and toward financials beforehand…”