Interest rates are rising in the U.S.. The 10 year Treasury yield is on the verge of breaking out from a sideways consolidation pattern.
As expected, the bears believe that “rising interest rates will kill the stock market!” History disproves this hypothesis. Rising interest rates are not consistently bearish for the stock market.
For starters, the S&P and 10 year yield are going up together right now.
The following chart places the S&P 500 above the 10 year yield. Blue boxes are when the 10 year yield went up.
As you can see, rising interest rates aren’t consistently bearish for stocks.
Here is the S&P overlapped with the 10 year Treasury yield (TNX) in each decade.
The S&P went up while interest rates went up during the 1960s.
The S&P was flat-down while interest rates went up during the 1970s.
The S&P was generally flat while interest rates went up during the 1980s.
When the 10 year yield went up, the S&P would sometimes be flat and would sometimes rally vigorously.
The S&P rallied vigorously while interest rates went up during the 2000’s.
The S&P rallied while interest rates went up during this decade.
The stock market’s correlation with rising interest rates is completely random.
- Sometimes the stock market will fall.
- Sometimes the stock market will be flat.
- Sometimes the stock market will rise.
In fact, the stock market rises more often than it falls when the 10 year Treasury yield rises. As a result, stock market investors should ignore interest rates. Even if there is an inverse correlation between stocks and the 10 year yield right now, you have no idea when that correlation will break.
Instead, investors should focus on the U.S. economy. The stock market and economy move in sync over the long run.
Yes, there will come a point in which interest rates start to hurt the economy and stock market. But no one knows what that specific level of interest rates is! It could be 3.5% on the 10 year yield, 4%, 4.5%, or 5%. Nobody knows. Hence, it’s better to ignore rates and just watch out for signs of economic deterioration.
Click here for more market studies