Lower Rates Aren't Always The Answer

Markets React To Federal Reserve Announcement On Interest Rates(Photo by Drew Angerer/Getty Images)

Markets React To Federal Reserve Announcement On Interest Rates(Photo by Drew Angerer/Getty Images) GETTY

The stock market received some boosts last week from two events in the news. First, on Tuesday it was reported that President Trump and China's President Xi will have a meeting at the G-20, which begins on June 28. Buying continued on Wednesday, with investors satisfied by the FOMC's announcement signaling their willingness to lower rates.

The stock market decline in May had accelerated over Tweet-induced fears that the trade fight with China was getting worse, not better. Since Fed Chair Powell expressed his concerns in early June, there have been signs of bullish enthusiasm due to investor’s belief that stocks can’t go lower as long as rates are declining.

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Many investors have just been involved in the stock market for the past ten years, and therefore may not be aware of what happened in past market cycles. For example, in early 2000, the yield on the 10-Year T-Note peaked in January at 6.820%, while the Nasdaq Composite made a high of 5048 in March before the bear market got underway. By November 2001, the yield had dropped to 4.31% while the Nasdaq Composite made a low in September of 1498, losing 70% of its value.

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Declining rates were also not enough to keep the stock market rally going in 2007. The 10-Year T-Note Yield peaked the week ending July 8, 2007, and the S&P 500 made a high one week later (line a). The NYSE Advance/Decline Line had peaked in May and then formed a lower high in July (line c). [Author's Note: I usually compare a major average to its own advance/decline data, but S&P 500 A/D data from before 2009 is not widely available.]

Over the next few weeks, the S&P 500 dropped over 100 points and while stocks then rebounded, yields kept declining. When the S&P 500 and other major averages made their bull market highs in October (line b) the 10 Year T-Note yield was in a clear downtrend.

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