Posted By: Investing CaffeinePosted date: June 07, 2015 10:50:11 AMIn: BusinessNo Comments Will Rising Interest Rates Murder The Stock Market? 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 exploding from 1.76% to 3.03% in 2013. Did the stock market crater? In fact, quite the contrary. The S&P 500 index 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 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). Market Yield Curve on the Side of Bulls Despite the trepidation over a series of potential Fed rate hikes, stocks continue to grind higher. If the fears are based on the expectation of a slowing economy on the horizon, then we would generally see two things happening. First, rising short-term interest rates would cause the yield curve to flatten, and then secondly, the yield curve would invert (typically a leading indicator for a recession). Currently, there are no signs of flattening or inverting. Actually, the recent better than expected jobs report for May (280,000 jobs added vs. estimate of 226,000) created a steeper yield curve – long-term interest rates increased more than short-term interest rates. Just as I wrote in 2009 about the recovery (see Steepening Yield Curve Recovery), right now the bond market is flashing recovery…not slowdown. In the face of the mini-interest rate spike, bank stocks are also signaling economic recovery – evidenced by the 2.75% surge in the KBW Bank Index (KBX) last week. If there were signs of dark clouds on the horizon, a flattening yield curve would squeeze bank net interest margins and profits, which ultimately would send bank investors to the exit. That phenomenon will eventually happen later in the economic cycle, but right now investors are voting in the opposite direction with their dollars. The media, economists, strategists, and other nervous onlookers will continue fretting over the Federal Reserve’s eventual rate increases. As long as dovish Janet Yellen is at the helm of the Fed, future rate increases will be measured, and rather than murdering the stock market, the policies will merely reflect a removal of the economy from artificial life support.
Eventually yes they will but it wont be the first, second or third one.... its always the last one which could be some years away. As long as rate increases reflect an improving economy i expect it to be a resonable environment for stocks. Expect EU to do better than US from current valuations.
Actually, the yield curve has been steepening lately. But thinking of it from a capital budgeting perspective, a rise in margin rates would make some leveraged investing strategies unfeasible. At which point, the algos that make up 70% percent of volume will find themselves to be the only players in the room. Quite a number of them will pull the kill switch. Less liquidity and volatile times ahead.
the poll question is too vague. there is a tipping point at which interest rates causes the market to collapse. even then people will argue that it is correlation not causation by interest rates which causes the market to collapse. also the absolute interest rate level may not be significant but how rapidly interest rates change will be much more important.
Separate from any traditional/fundamental arguments: Am I missing something or am I the only one who sees this: Isn't all this HFT Proprietary trading (as opposed to execution) that accounts for such a percentage of the market volume dependent on gearing up (and thus low interest rate sand loose credit) to get a viable RoE?