The U.S. stock market has been falling over the past few days while interest rates went up. As expected, the bears are screaming “rising interest rates will kill the stock market!” History disproves this hypothesis. Rising interest rates are not consistently bearish for the stock market.
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. The U.S. economy is growing at a healthy pace right now and shows no signs of deterioration.
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.
The stock market’s selloff this week was not “due to rising interest rates”. Rising rates was merely a trigger. This is the longest rally in history without a 6%+ “small correction”. Hence, ANY trigger can bring the stock market down. We just don’t know what the trigger is beforehand. Rising interest rates was merely an excuse for the stock market selloff.