"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:

RatesDownStocksDown

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.

Crude Oil Erases Early October Gains: The "Key" Level that Made All the Difference

When crude oil prices broke below critical price support, our Energy Pro Service made sure subscribers were ready for the opportunity. See the chart and analysis right now.

How to Stay Ahead of Price Turns in the U.S. Long Bond

Back in August, the volatility index for Treasury debt was at an all-time low. Bond market observers were discussing “fresh reasons to stay record bullish.” Yet, Elliott wave analysis was sending a different message. Let’s review.

EXCLUSIVE

Trump vs. Biden: Discover What the Stock Market Says About the Race for the White House

The presidential race is in the home stretch. What does the market say about who is likely to win? And what will a Trump re-election or a Biden victory mean for the stock market?