Stocks have not adjusted to the new normal - and it's giving investors a difficult choice

Everything has a price but prices take time to adjust. After all, monetary policy has long and variable lags on the economy and on markets. Interest rate hikes take time to filter through to valuations across all assets and the more drawn out the cycle, the longer the lag. 

And as the below chart shows, every rate hike takes its toll on risk assets like the equity market.

The cost of financing goes up, the cost of debt goes up, and the psychological/sentiment cost of trying to source extra debt in a market that has no interest in debt-laden firms has soared. Just think of all the companies that have tried to raise capital in the last 12 months and how investors have reacted to them. 

Hikes also take their time (and toll) on the consumer and on corporate earnings. As Australia inches ever closer to running out of excess savings, corporates must adapt to a customer that will have less cash and need to find a way to live on less. 

When he was asked if we are at this tipping point yet, Alexandre Ventelon, Head of Investment Strategy and Research at Morgan Stanley Wealth Management argued that we are still in the weeds of working out what this post-COVID normal actually means for valuations.