Interest Rates And Stocks: Heads You Lose … Tails You Lose!

man holding his chin facing laptop computer

The Great Conundrum 

In January of 2020 the 10-year US Treasury opened the new year trading with a yield of 1.8%. The S&P 500 was on its way to a 4.6% gain and a new record high by February. Then Covid-19 hit and in the flight to safety that followed  the 10-year yield went below one half of one percent (less than 50 basis points). The confusion comes in when you consider the broadly accepted concept that low interest rates are supposed to be good for business and good for stock prices. My question is why didn’t stocks take off, go through roof, on this dramatic drop in rates? Why wasn’t there a hue and cry on the part of the media and pundits to buy stocks when rates were in the cellar last spring? It was crickets. Everyone was looking for more shoes to drop.

Now that the market has righted itself those same experts are warning us that rising interest rates and the specter of rising inflation are going to be BAD for stocks. 

Heads you lose …tails you lose.  Ridiculous.

Over reaction by the media

The media rush to board the pain train was pretty predictable. I wrote about it last November 14: “Interest rates are going through the ceiling–The next BIG Thing to worry about.”

Art Cashin

Art Cashin

Again, this should not be surprising. Their job is to get our attention and keep it and they know bad news sells. CNBC knows how to bring it home: “(Art) Cashin expects more stock pain as traders worry the Fed may be losing control of the bond market.” What a cheerful prospect this grizzled Wall Street veteran serves up.

What’s interesting here is that if this were to be the case, the ‘flight to safety trade’ could easily kick in because of the fear that dramatically higher rates would throw the economy into a tailspin. Investors would sell stocks and buy treasuries up and down the maturity spectrum and rates would fall dramatically. Of course, this is but a speculation on my part but we did have evidence Friday, as the 10-year rallied on the close with the yield dropping 11 basis points. The 10-year closed trading for last week at a yield of 1.407%, down from high that day of almost 1.56% .

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Disclaimer: The information presented here represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain ...

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