Interest rates SURGED. Is this bearish for the stock market?


Interest rates “surged” yesterday”. The 10 year Treasury yield went up more than 3.4%

Mainstream financial media attributes today’s stock market decline to rising interest rates. Funny enough, the same thing was said earlier this year from April – May 2018, yet the stock market went up.
We’ve demonstrated before that rising interest rates aren’t consistently bearish for stocks. We’ve demonstrated that the stock market goes up more often than it goes down when interest rates rise.

Here’s another way to look at this. $TNX (10 year yield) went up more than 3.4% this Wednesday.
These interest rate spikes are very common. In fact, they’ve happened 211 times from 1970 – present.
When $TNX spiked more than 3.4% in 1 day:

  1. 1 year later, the S&P 500 was higher 85% of the time.
  2. 2 years later, the S&P 500 was higher 92% of the time.


As you can see, rising interest rates aren’t consistently bearish for the stock market. There’s no certainty in the markets. There’s only probability. And more often than not, interest rates and the stock market go up together. It’s just that when interest rates go up, the stock market’s rally becomes choppier.
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3 comments add yours

  1. Love your posts.
    I have two concerns with this study. The first is that a 3% move in interest rates is not equal, because a 3% move at 2% is quite different from a move when the ten year is at 5%. The other issue is that historical models don’t capture the fact that America’s high debt level makes the stock market and economy more sensitive to interest rate changes.
    Thanks for your work.
    Sincerely,
    Vish

    • Hi Vish,
      True. It all comes down to what you want to use. An absolute change in interest rates, or percentage.
      I picked percentage because from my perspective, it seems to make more sense.
      E.g. here are 2 scenarios:
      Scenario 1: 10 year yield goes from 1% to 2%. That is quite hard (doubling of the yield)
      Scenario 2: 10 year yield goes from 20% to 21%. That is quite easy (e.g. happened all the time in the 1970s)
      As for rising debt, what matters is how easily you can service the debt (rather than absolute debt levels). Servicing debt has been easy despite rising interest rates because incomes are going up as well https://bullmarkets.co/wp-content/uploads/2018/10/very-easy.png

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