Study: when will rising interest rates hurt stocks?


I demonstrated that rising interest rates aren’t consistently bearish for the stock market. I also demonstrated that rising inflation isn’t consistently bearish for the stock market.
Some investors and traders try to use “S&P 500’s earnings yield – 10 year Treasury yield” to predict bear markets and “significant corrections”. This doesn’t work. You can see in the following chart:

  1. Sometimes the 10 year yield is above the S&P’s earnings yield when a bear market or significant correction begins. Sometimes the 10 year yield is below the S&P’s earnings yield when a bear market or significant correction begins.
  2. The S&P’s earnings yield is still significantly above the 10 year Treasury yield. It will still be significantly above the 10 year Treasury yield if the 10 year Treasury yield went up another 1%.


Correlations also show that stocks and interest rates tend to go up together UNTIL the 10 year Treasury yield reaches approximately 4.5-5%.

The stock market’s 4 bear markets since 1950 began when inflation was much higher than where it is today.

December 2, 1968

This bear market began when the 10 year Treasury yield was at 5.9%.

January 12, 1973

This bear market began when the 10 year Treasury yield was at 6.4%.

March 24, 2000

This bear market began when the 10 year Treasury yield was at 6.1%.

October 12, 2007

This bear market began when the 10 year Treasury yield was at 4.6%

Likewise, recessions that were accompanied by “significant corrections” began when inflation was much higher than where it is today.

January 1980

This recession began when the 10 year Treasury yield was at 10.5%

July 1981

This recession began when the 10 year Treasury yield was at 13.8%

July 1990

This recession began when the 10 year Treasury yield was at 8.4%

Conclusion

Interest rates still have a long way to go before they start hurting the stock market and U.S. economy. Fears of rising inflation and interest rates are overblown right now.
Read Study: the stock market will probably go higher over the next year

3 comments add yours

  1. Hi Troy, have you ran the same study using real rather than nominal interest rates?

    • Yea I could try that. But real interest rates are close to zero right now (less than 1% on the 10 year yield).

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