Real Vision Investment Case Study Competition: Don’t you miss interest rates?

Ryerson MBA is participating in The Economist’s Real Vision Investment Case Study against teams from some of the world’s other leading MBA programs. Their challenge? Analyze Walmart and Amazon to determine which retail giant’s stock is the better investment choice over the next 10 years.

Here, team member Jesse Berger discusses the impact of the absence of interest rates and how it influenced their analysis. Visit The Economist website to view the full analysis and vote for Ryerson MBA.

In the Macro Analysis section of our written submission, we wrote that, “extended zero percent interest rates and aggressive monetary base expansionary policies… fundamentally altered the relationship of economic conditions to financial markets, and by extension, the price discovery mechanism.”

There’s enough material out there, and I have more than enough interest in it (no pun intended), that I could write a thesis on this subject. We barely scratched the surface in our report, and I wanted to take this opportunity to comment further given recent developments in the marketplace.

There have been two major interest rate–related events since our paper was published. First, on December 16, 2015, the Federal Reserve raised their target funds rate by 25 basis points from what was effectively zero – the first such increase in a decade. Second, On January 29, 2016, the Bank of Japan made headlines by dropping their benchmark rate into negative territory, at an unconventional -0.1%.

The Fed’s move was their first step towards normalization – the process of slowly increasing rates towards historical norms. This was done under the auspices of an economic recovery, whose strength could absorb a minimal hike. Initially, the Fed’s intention was to continue along with these 0.25% increases every 3–6 months until a normal rate environment was achieved. However, given the markets’ reactions (as of February 4, 2016, the S&P 500 is down 7.7% and the NYSE is down 7.1%), there’s reason to believe that the economy is actually quite fragile, which could slow, or even reverse, the course of normalization. While such an about-face could damage whatever credibility the Fed had accrued leading up to that first rate hike, additional increases could cause further economic strain, placing the Fed squarely between a rock and a hard place.

Japan’s surprise decision to join the growing chorus of central banks tempting fate with negative interest rates only casts more doubt on the veracity of the global economy. Although briefly tested during the last few months by Denmark, Sweden, and Switzerland, Japan’s decision to wade into negative rate waters means that a quarter of the world’s GDP is now accounted for by countries whose central banks have resorted to a negative interest rate policy, further sliding down the slippery slope of slumping rates.

If interest rates are to be trusted as the “free” market “cost of money”, then there should probably be an actual cost associated with it. The long-term impact that the absence of interest rates has had and will have on the global markets cannot be overstated, and was a big reason why we decided to incorporate an economic element into our analysis.

To find out how we measured their impact on the stock prices of Amazon and Walmart, please check out our presentation.

And don’t forget to vote for us for the People’s Choice Award – registered users can vote daily.