Will Rising Bond Yields Send Stock Prices Tumbling?
Conventional Wall Street wisdom says "rising rates are bad for stocks." Let's put that belief to a test.
by Bob Stokes
Updated: April 26, 2018
One of the big financial news stories on April 24 was that the 10-year Treasury yield hit 3% for the first time since 2014.
The other big financial news story was that the DJIA closed 424 points lower on that day.
As you probably know, the conventional wisdom on Wall Street is that investors will sell stocks in favor of bonds when yields reach an attractive level. So, it's not surprising that many pundits blamed the DJIA's triple-digit decline on rising bond yields.
Here's a sample April 24 headline along with higher bond yield warnings from the past few months:
- Here's the threat to the stock market from rising bond yields (Marketwatch, April 24)
- Rising bond yields could win next round in battle with stock market (CNBC, Feb. 7)
- How Spiking Bond Yields Could Topple a Stock Market Rally (Bloomberg, Feb. 4)
But, is the conventional wisdom that says higher bond yields will send stocks lower correct?
Well, our research reveals that there is no consistent correlation between interest rates or bond yields and the stock market.
Take a look at these charts from Robert Prechter's 2017 book, The Socionomic Theory of Finance:
The book notes:
Figure 2 shows a history of the four biggest stock market declines of the past hundred years. The graphs display routs of 54% to 89%. In all four cases, interest rates fell, and in two of those cases they went all the way to zero. ... [Conversely, Figure 3 shows when stocks climbed as interest rates climbed].
[Yet,] there have been plenty of times when the stock prices rose and interest rates fell. It happened, for example, in the period from 1984 to 1987, when stock indexes more than doubled while interest rates fell by half, [as Figure 4 shows].
[Looking at Figure 5,]. there have also been times when stocks fell and interest rates rose, as in 1973-1974 when stock indexes dropped nearly in half as interest rates doubled.
So, you can see why it's folly to forecast the stock market based solely on the direction of rates. What’s more, this lack of "cause and effect" doesn't just apply to interest rates.
In fact, our research shows that there is not a single factor outside of the stock market itself that determines the trend of aggregate stock prices.
Elliott Wave Principle, the Wall Street classic book by Frost & Prechter, says:
Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own.
We call that law the Elliott Wave Principle.
See what it is showing us about the stock market's next big move.
Let Our Elliott Wave Experts -- Backed by Decades of Market Observation and Experience -- Show You What They See
Here's why it's important that you do so now: The most important shift in at least 10 years appears to be underway in the stock market.
Yes, it has already started.
If our analysis is correct, very few investment professionals realize the historical nature of today's market juncture.
Here's what we can help you do:
Reset Your Thinking By Understanding True Market Dynamics
You start by receiving a copy of Robert Prechter's new book, The Socionomic Theory of Finance. Thirteen years in the making, STF exposes layers of flawed assumptions and offers you a new approach. The book is jaw-dropping and, at times, an uncomfortable read. STF uses history to painstakingly challenge beliefs. It shows what actually happens in the markets. It does so fearlessly, taking on even the most sacred of assumptions. The book is acclaimed by academics, practitioners and investors alike as a landmark paradigm-setter. It comes in print and online editions and sells for $99. We include it free with your Financial Forecast Service bundle.
Your next step is to be sure to stay alert, on the lookout for danger and opportunity. The Financial Forecast Service equips you to do this.
Get The Socionomic Theory of Finance FREE with your subscription to the Financial Forecast Service.
45 Days of the Financial Forecast Service
+ The Socionomic Theory of Finance
and save 35%
Get the digital version of this ground-breaking book FREE
with 45 days of our flagship Financial Forecast Service.