Will Rising Rates Murder The Market?

 

China Executes Wall Street Solution

 

After an obituary of Mark Twain had been mistakenly published in the United States, Twain sent a cable from London stating, “The reports of my death have been greatly exaggerated.” Similar reports about the death of the stock market have been prematurely published as well. If you were to listen to the talking heads on TV or other self-proclaimed media pundits, the prevailing opinion is that rising interest rates will murder the stock market. In reality, the benchmark 10-Year Treasury Note has risen a whopping 0.23% so far this year. Could this be a start of a more prolonged increase in interest rates? It is certainly possible. Most investors have a very short memory because we have seen this movie before. It was just two short years ago that we witnessed a near doubling of 10-Year Treasury yields (TNX) exploding from 1.76% to 3.03% in 2013. Did the stock market crater? In fact, quite the contrary. The S&P 500 index (SPY) catapulted higher by a whopping +30%.

Even if we go back a litter further in recent history, interest rates were quite a bit higher. For example in early 2010, 10-Year Treasury yields breached 4.0%. Where was the Dow Jones Industrial index (DIA) then? A mere 11,000 vs 17,850 today. Or in other words, when interest rates were significantly higher than today’s 2.40% yield, the stock market managed to climb +62% higher. Not too shabby, eh? As I have talked about in the past (see Don’t Be a Fool, Follow the Stool), there are other factors besides interest rates that are contributing to positive stock returns – primarily profits, valuations, and sentiment are the other key factors in determining stock prices. Suffice it to say, over the last five years, stocks have survived quite well in the face of multiple interest rate spikes; the 2013 “Taper Tantrum”; and the subsequent completion of quantitative easing – QE (see chart below).

Underlying Chart: Yahoo Finance!

 

Underlying Chart: Yahoo Finance!

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Disclosure: Sidoxia Capital Management (SCM) and some of its clients ...

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Susan Alter 5 years ago Member's comment

Really interesting, thanks.