As you probably know, interest rates have been increasing recently. And right on cue, the permabears have come out with “there has never been as large of a percentage change in rates over a 24-month period as seen currently. Every other period resulted in a recession, correction, or a crisis.”
*Quote from a popular permabear, who shall remain unnamed.
How factual is this? Here’s the data, from 1962 – present.
Over the past 24 months, the 10 year yield has increased by more than 70%. Here are all the historical instances in which the 10 year yield increased by more than 70% over the past 24 months:
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- June 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
As you can see, the permabear’s statement isn’t true. Saying that “rising interest rates ‘eventually’ leads to a recession/crisis” is like saying “when the weather gets hot, cold weather ‘eventually’ ensues.
“Eventually” can take a long time.
Here’s a very interesting study from NYU:
From 1928 – present, there have only been 3 years during which the stock market went down while interest rates went up:
*During that same time period, interest rates went up 15 years. Which means that in 12 of those 15 years, the stock market and interest rates went up together.
The reason for this is simple. Absent SOARING inflation, rising interest rates signify a strengthening economy. An improving economy = medium-long term bullish for the stock market, because the stock market and economy move in the same direction.
And lastly, Emilio wrote a very interesting comment in the Facebook Group.
Here’s the data. This plots the 10 year yield’s change over the past 2 years vs. the S&P 500’s 2 year forward returns.
As you can see, although there is a slight inverse correlation, this inverse correlation is very weak.
R squared = 0.0048, which is to say that the change in Treasury yields has almost no impact on the S&P 500’s 2 year forward returns.
And lastly, this chart overlaps the S&P 500 against rising interest rates. You can see the stock market’s reaction to rising interest rates is mostly random.
Click here for more data.