Since 1928, the correlation between the annual change in the 10-year U.S. Treasury yield and the S&P 500’s total return is effectively 0 (.02). In plain English this means that in any given year, interest rates rise or fall without any predictive value over stock market performance.
Indeed, in recent history that has been more often the case, with the two worst years (2008 [-36.6% S&P 500] and 2002 [-22% S&P 500]) occurring when the 10-year yield fell 1.81% and 1.23% respectively. That is not to say that stocks haven’t had great years when rates have fallen. They have. Some of the best years in history have occurred in years of falling rates (1935, 1936, 1945, 1954, 1985, 1989, 1991, 1995, and 1997). But falling rates is neither a requirement for nor a guarantee of positive stock market returns.
Confused yet? Good, you should be, for is it not easy to reconcile the idea that stock market returns can be positive on average in both rising and falling interest rate periods. It is also not intuitive, given the importance of interest rates and how frequently their direction is discussed, that one could not anticipate the direction of stock prices even if they predicted correctly where interest rates were going.
Given the difficulty in predicting not only interest rates but also their impact on stocks, why then do we waste so much time listening to pundits and their prophesies on such topics? Because most of the day-to-day market action is noise, but saying as much goes against the business model of entertaining viewers with bold forecasts and calls. And most people seem to prefer entertainment over analysis.
Indeed, in recent history that has been more often the case, with the two worst years (2008 [-36.6% S&P 500] and 2002 [-22% S&P 500]) occurring when the 10-year yield fell 1.81% and 1.23% respectively. That is not to say that stocks haven’t had great years when rates have fallen. They have. Some of the best years in history have occurred in years of falling rates (1935, 1936, 1945, 1954, 1985, 1989, 1991, 1995, and 1997). But falling rates is neither a requirement for nor a guarantee of positive stock market returns.
Confused yet? Good, you should be, for is it not easy to reconcile the idea that stock market returns can be positive on average in both rising and falling interest rate periods. It is also not intuitive, given the importance of interest rates and how frequently their direction is discussed, that one could not anticipate the direction of stock prices even if they predicted correctly where interest rates were going.
Given the difficulty in predicting not only interest rates but also their impact on stocks, why then do we waste so much time listening to pundits and their prophesies on such topics? Because most of the day-to-day market action is noise, but saying as much goes against the business model of entertaining viewers with bold forecasts and calls. And most people seem to prefer entertainment over analysis.
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