Watch interest rates steer stocks forward

It does not take much to determine the future of the stock market, the direction of interest rates tells it all, well, almost, but profits cannot be ignored. The accompanying chart suggests that the Bank of Jamaica’s recent hikes in interest rates won’t last much longer, a fact that stock market investors need to ponder early in 2023.
While the Bank of Jamaica only recently pushed their Overnight rate to 7 percent, Interest rates on Treasury bills may have peaked as far back as April 2022, with the 182 days’ Treasury bill rate averaging 8.46 percent in the April auction and moderated slightly downwards since, an indication that the market determined rates were at or close to the peak.
Bank of Jamaica moved their overnight interest rates charged to banks from 0.50 percent in September 2021 to 7 percent in November last year, a measure implemented mainly to tame inflation. Inflation has cooled sharply from the high in 2021 and is on the way down. The foreign exchange market buoyancy resulted in some appreciation of the Jamaican dollar, while the NIR seems to have risen to record levels for an end of year close.
The attached chart shows investors tending to react belatedly in response to interest rate movements. Profit ultimately is the primary long term driver of stock values. If interest rates are falling and so are profits, stock prices are unlikely to increase in the short run, the reverse is true. It is, therefore, not surprising that many companies listed on the Junior Market that enjoyed a substantial increase in profits registered good gains in stock prices in 2022, with seven gaining between 100 percent and 312 percent and 8 gaining 50 to 99 percent even as the Junior Market index rose only 16.3 percent for the year, while 21 Main Market stocks gained between 2 and 82 percent for the year, following a 10.2 percent decline in the JSE Main Index and 8 percent for the All Jamaica Composite Index. In all, 22 stocks gained more than the market average. Although not spectacular, the movement in the market was vastly better than the increase in Treasury bill interest rates, which jumped 89 percent above the 4.33 percent rate at the end of December 2021.
Investors can look forward to a fall in rates in 2023 as inflation moderates substantially and falls within BOJ’s 4-6 percent target during 2023. That development will likely be more impactful for Junior Market stocks that will enjoy a higher profit increase than those in the Main Market.