Study: rising interest rates aren't bearish for stocks


Interest rates are rising in the U.S.. The 10 year Treasury yield is on the verge of breaking out from a sideways consolidation pattern.

As expected, the bears believe that “rising interest rates will kill the stock market!” History disproves this hypothesis. Rising interest rates are not consistently bearish for the stock market.
For starters, the S&P and 10 year yield are going up together right now.

The following chart places the S&P 500 above the 10 year yield. Blue boxes are when the 10 year yield went up.
As you can see, rising interest rates aren’t consistently bearish for stocks.

Here is the S&P overlapped with the 10 year Treasury yield (TNX) in each decade.

1960s

The S&P went up while interest rates went up during the 1960s.

1970s

The S&P was flat-down while interest rates went up during the 1970s.

1980s

The S&P was generally flat while interest rates went up during the 1980s.

1990s

When the 10 year yield went up, the S&P would sometimes be flat and would sometimes rally vigorously.

2000s

The S&P rallied vigorously while interest rates went up during the 2000’s.

2010s

The S&P rallied while interest rates went up during this decade.

Conclusion

The stock market’s correlation with rising interest rates is completely random.

  1. Sometimes the stock market will fall.
  2. Sometimes the stock market will be flat.
  3. Sometimes the stock market will rise.

In fact, the stock market rises more often than it falls when the 10 year Treasury yield rises. As a result, stock market investors should ignore interest rates. Even if there is an inverse correlation between stocks and the 10 year yield right now, you have no idea when that correlation will break.
Instead, investors should focus on the U.S. economy. The stock market and economy move in sync over the long run.
Yes, there will come a point in which interest rates start to hurt the economy and stock market. But no one knows what that specific level of interest rates is! It could be 3.5% on the 10 year yield, 4%, 4.5%, or 5%. Nobody knows. Hence, it’s better to ignore rates and just watch out for signs of economic deterioration.
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14 comments add yours

  1. The U.S. stock market has been falling over the past few days while interest rates went up. As expected, the bears are screaming “rising interest rates will kill the stock market!” History disproves this hypothesis. Rising interest rates are not consistently bearish for the stock market.
    ***. Troy then what made the market pull in 4% in 1 week the worst Friday since brexit of June 2016! What did it, pension fund profit taking??

  2. Troy, then why a 4% pull in, and the worse Friday since brexit of June 2016, when there was no geopolitical risks? This was a major move Friday, institutional pension funds taking profits?

    • Most short term movements don’t have an explanation. Technical in nature. The “news” is just an excuse.

      • I agreed it doesn’t need a economical reason. I think the ‘reason’ is mainly psychological that people want to cash in part of the profit.

  3. Troy,
    Can u do a blog post using historical data on what the market does after a 4% down week, or what the market does after a day like Friday which was the same pattern in June 2016 after brexit. Thank you

  4. last week i went in heavier on $QQQ and $GDX. bought a small piece of $VXX but no where what i needed to cover staggering days loss. do you still see room to buy more $QQQ? and on the $GDX front many are suggesting a run down to 17 before he shoots back up. wondering if i should bail on $GDX at my 23 position and get out of the fall?

  5. June 24th 2016 s&p (brexit) opened 2103.81. A 2 day Low to 2000.54. Which was a 103 handle pullin. Compared with (now). Highs of s&p of 2872.87 to Friday’s low 2760. Which is a 113 handle pullin. * now brexit was a geopolitical event for a 2 day move of 103 s&p points. This current move was a 5 day move of 113 points from all time highs to Friday’s close. My data is missing the percentage of brexit vs the percentage of last weeks all time high to Friday’s close. I am only mentioning brexit because the news media keeps stating that Friday’s move was the same move as brexit in terms of percentage. Obviously as the more s&p increases in price the larger the price fluctuations will be in terms of percentage. Example: 20% of 2000 is 400. Vs 20% of 3,000 is 600. So as s&p increases in price over the long term the % of moves in s&p pricing will be greater.
    Looks like I can’t really get any comparison here but wanted to point out that brexit was a geopolitical event vs. last weeks oversold parabolic melt up in s&p price mean reverting. A geopolitical event I would think ways more than mean reversion. So my conclusion is that of sentiment shift and the thinking of legendary investor George Soros. Soros made his money on sentiment shifts and how politics affect pricing. It is well reported that George Soros left a party he was attending when trump was the official winner of the presidential election, he left to quickly purchase es futures. So my conclusion is that since there was no major geopolitical event, that brexit was only a two-day move, that last week was nothing more then a major sentiment shift, because like Soros says, the big money is made on sentiment shift and not the valuations.

  6. Troy. Maybe this is just a 2 day market pullin like brexit was a two day event, then we rally to new highs with lower weekly rsi then gut and rugpull the market for the 6% correction. since big money is made by hunting and gutting the herd mentality of sentiment shift.

  7. Weird coincidence: SPX bottomed at 666 in March 2009 & Friday DJIA fell 666 points. Does 666 appearing mark a turning point again?!?

    • I think it’s just a weird coincidence. The market bottomed at 666 in March 2009.

  8. Additionally, crude recently topped at 66.66 and S&P’s cumulative monthly return for December and January was 6.66%

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