Will Rate Cut Fuel Stock Market to 100K?

November 10, 2024 (MLN): There are plenty of evidences that Stock Markets and Bond Yields are interconnected, as rise in one often leading to a decline in the other.

Therefore, a shift in the Yield Curve or a change in its shape is often seen as an early indicator of a rise or fall in the Stock Market. As changes in the Yield Curve reflect market participants’ expectations of future interest rates, therefore, as Policy Rate begins to trend upward, stock investors may view this as a signal to allocate more capital to stock investments.

This is precisely what’s unfolding right now. After remaining at 22% from July 2023 to January 2024, the Policy Rate dropped sharply to 17.5%. It declined by 450 basis points in just four months, from June to September 2024.

Our Stock Market reacted to the cuts in the Policy Rate, consistent with the principle of their inverse relationship. The market surged from 41K to 86K and is now projected to peak at 100K as the Policy Rate is expected to bottom out in the single digits.

Although this shift brought optimism to investors, uncertainty about the Stock Market reaching 100K still persists. Considering that easing of this concern is crucial for investors, as it would encourage them to commit additional capital to stocks by pushing their risk and return boundaries further outward, a study carried out to serve the purpose.

Policy rate data from the past four years, covering the period from January 19, 2020, to July 29, 2024, was collected and divided into four distinct segments:

January 22, 1999, to July 15, 1999

July 15, 1999, to June 25, 2020

September 21, 2021, to June 23, 2023 and

June 10, 2024, to the present

Each period reflects a timeframe during which changes in the policy rate occurred. This data then paired with change in PSX-100 index accordingly.

Although not statistically tested, the infographics, along with the data presented below, support the widely accepted axiom of an inverse relationship between the two. However, there were exceptions where the Stock Market either did not respond to a cut in the Policy Rate or showed a delayed reaction.

 Instances where the Stock Market failed to respond to a cut in the Policy Rate or reacted with a time lag suggest that:

• Decline in the policy rate cannot drive the index up alone &
• Presence of other factors is essential to move index upwardly

John Calverley in his book ‘The Investor’s Guide to Economic Fundamentals’, identified several factors along-with bond yields potentially influential to drive up/down the PSX in response to changes in those variables. The most significant among them, along with their likely impact on Stock Market, are as follows:

Individuals may add to or remove items from the list based on their experience understanding relationship between the economy, politics and the capital market.

Complete the matrix below and asses likelihood of the PSX-100 Index hitting to 100K with fall in Policy Rate to single digits.

An Educated Understanding of Stock Market is a Sure path to Successful Investing

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