Jun

28

In decades past, lower interest rates were highly bullish for stocks. However, in running a regression of 4-month S&P 500 changes versus the change during the previous 4 months of the 3-month Treasury bill yield, I found that since 1996, the S&P 500 has been more likely to go up after interest rates rise. Following are the most recent data points.

.            4-month change in
.            —————–
.                      3-month
. 4 months   S&P 500    T-Bill
.   ending   futures   yield %
. 8/29/2003             -0.14
.12/31/2003     10%     -0.05
. 4/30/2004      0%      0.04
. 8/31/2004      0%      0.62
.12/31/2004     10%      0.61
. 4/29/2005     -5%      0.66
. 8/31/2005      5%      0.59
.12/30/2005      2%      0.55
. 4/28/2006      4%      0.67
. 8/31/2006     -2%      0.26
.12/29/2006      8%     -0.02
. 4/30/2007      3%     -0.17
. 8/31/2007     -2%     -0.73
.12/31/2007     -2%     -0.85
. 4/30/2008     -6%      -1.8
. 8/29/2008     -8%      0.35
.12/31/2008    -30%     -1.57
. 4/30/2009     -3%
 

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3 Comments so far

  1. Jason Brown on June 29, 2009 10:52 am

    Is it possible that interest rates no longer reflect the true situation inside the credit markets?

    If this is the case, there must be easy money somewhere despite the appearance of a tight credit market. Banks are capable of distorting reality and not just in the housing market. Classic market deception.

    If this is not the case, reflexivity is at work somehow in removing the significance of interest rate on stock prices. Stocks up, bonds up is not a situation representative of a market in a consolidation phase. Something is perverting this basic relationship, perhaps inflation and massive stimulus spending on the part of government. All that Katrina money had to go somewhere. Lots of money was just given away with little or no oversight for a very long time and there very well could be enough of it to distort the ecological balance of the economy and change basic market relations.

    This is my first post here at Daily Speculations. My specialties include classical piano, physics and mathematics. I bought Alchemy of Finance at a dollar store and learned what little I know mostly from that book. I have a humble but stable job and this enables me to begin my career in speculation. Instead of sitting on the sidelines watching the markets move, compelled to be washed away in its currents like every other obedient little lemming shackled to their 401K, I have decided to take matters into my own hands for good or for ill.

  2. Travis Steward on June 29, 2009 11:14 am

    Interest rates only matter in so far as the capacity to take on debt is accomodating. Literally, this crisis has been about the destruction of credit standards and traditional metrics on how to gauge an individual’s or business’ economic viability.

    You can lower rates all you want now, but no one will lend. This is the final act of the dying Fed: when it realizes it can no longer induce individuals to lever up their balance sheets.

    The current climate is almost like a true free market in some senses. With the banks so impaired, the economy has almost reverted to a pure savings economy. If you want credit you need to work your private channels and find a willing 1 for 1 lender of their own capital. It’s very interesting times indeed.

  3. Jim Rogers on January 30, 2011 9:12 pm

    McKinsey Quarterly currently has a piece titled “Five Myths About US Interest Rates” (found at http://bit.ly/gD0uf4; registration may be required) that bring up some speculative support. A couple of the piece’s ideas include the notion that higher rates might limit bubbles and that demand for financial engineering products might fall (due to unfavorable borrowing conditions) and demand for actual asset-based projects might rise, resulting in a revamped (and more competitive) infrastructure in the US.

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