“I think this could be a lost decade in terms of equity appreciation,” he said, referring to a term commonly used to describe a period in the 1990s when Japan experienced economic stagnation. He explained that current low interest rates may not dip further and may instead rise to more normal levels in the coming years.
Higher interest rates, in many instances, tend to negatively affect corporate earnings and stock prices. High borrowing costs will eat into company profits and hurt share prices. In addition, companies will face “plenty of headwinds” that put pressure on earnings, he said. That include higher taxes, increase in operating costs, less efficient supply chains and “deglobalization” that will hurt productivity, explained James.
Despite the severe economic hit from the coronavirus pandemic, U.S. stock markets have climbed higher after plunging in March. James attributed such momentum to the Federal Reserve bringing interest rates down to near zero, which left investors hunting for yield with few options to park their money. That’s why investors are piling into riskier bonds and stocks, he explained.
“Zero interest rates is the driving force here, near zero interest rates,” he said.