"Rates Down, Stocks Up"? Myth … Busted!
Let’s address widespread assumptions about interest rates and the stock market
by Bob Stokes
Updated: October 06, 2020
There's a widespread belief that rising interest rates are bad for stocks and a lower interest rate trend is good for stocks.
The reasoning behind that belief is that bonds compete with stocks for investment funds. Hence, the higher the yield investors can get from bonds, the less attractive stocks become and vice-versa.
This assumption sounds logical, but in reality, stock market investors do not take their cue from rising or falling yields (or interest rates).
Yes, there have been times in financial history when rising rates have coincided with falling stock prices and vice versa. Yet, there have also been periods when stocks have risen as rates have risen, and times when lower rates have coincided with falling stock prices. A notable example of the latter in the U.S. occurred during the Great Depression of the late 1920s and early 1930s. The DJIA plummeted 89% from August 1929 to July 1932 as interest rates trended lower. Also, interest rates trended lower as the NASDAQ fell 78% from March 2000 to October 2002 and as the DJIA tumbled 54% from October 2007 into March 2009.
Even so, a September 2020 Financial Times column said:
Equity Investors Should Raise a Glass to Low Rates
This year, equity investors have been shouting "three cheers" for central banks.
Yet, our just-published October Global Market Perspective showed these two charts and said:
These two charts illustrate the fallacious, yet pervasive belief that falling interest rates are a big boost for stocks. Ten-year interest rates in Spain have dropped from 4% in 2007 to nearly 0% today. Yet the broad market IBEX plummeted almost 60% over the same span. In Portugal, 10-year rates were approaching 6% when the PSI 20 peaked at its 2000 all-time high. Rates surged to about 16% during the 2012 sovereign debt crisis and then crashed to 0.24%. Despite an overall decline in borrowing costs, the PSI-20 is lower today than it was in 2012, and shares are down an astounding 71% over the past 21 years.
So, it's a myth that the trend of interest rates determines the trend of the stock market.
Indeed, a review of financial history shows no reliable relationship between stock trends and any external factor.
However, the Elliott wave model's recognizable and repetitive patterns do offer predictive value for global stock market investors.
Get the insights that you need to know in our just-published Global Market Perspective.
Global Equity Markets Don’t Require a "Reason" to Make Sudden, Big Moves
The history of global stock markets is clear: they've made big price moves on days when there was no big news.
What's more, some trading days see price moves in the opposite direction of the headlines: In other words, stock prices rose after bad news, and fell when news was good.
Ever wonder why?
Put simply: News and events do not drive market trends.
Yes, global stock markets might have brief emotional reactions, but then the main trends pick up where they left off.
You see, markets the world over are really driven by investor psychology -- Elliott waves directly reflect this psychology.
Learn what the Elliott wave patterns of major global stock markets are saying so you can prepare for the next big moves.
Forget the Fed -- Watch the Waves
The Federal Reserve, and to a lesser degree the European Central Bank, have dominated the conversation about interest rates lately. But watch our Interest Rates Pro Service analyst Ivo Zhelev apply textbook Elliott waves to forecast the price of the UK's Long Gilt -- and, by extension, UK interest rates -- without a single glance at central bank statements.
Why a U.S. Recession May Foil Economists’ Expectations
A recent survey reveals positive expectations for the economy by a group of "professional forecasters." Learn why you may not want to bet the farm on that expectation. This chart compares leading economic indicators around the time of past recessions with what's going on now.
Gold Mining Stocks Lead Gold Lower: What’s “Fundamentals” Got to Do with It?
In mid-April, gold mining stocks led by VANECK GOLD MINERS ETF turned down from one-year highs to 3-month lows in May. Gold followed, reversing from all-time highs on May 4 to multi-month lows on May 25. We don't need another "fundamental" explanation for why.
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