Update – Fed losing control of bond market?… http://www.youtube.com/watch?v=g5V-yqBn-2w
Conventional wisdom which suggests that rising interest rates crush stock prices and that falling rates stimulate the market.
I first published a version of this chart on a message board in 2007, when the Fed cut rates after a market selloff. I’m not unique in charting this relationship, nor in using it to challenge conventional thinking, but I do think that I have something to contribute to the discussion.
At that time, in 2007, the market was struggling and the consensus was that cutting rates would ’save the day’.
This chart suggested otherwise and was subsequently proved correct. Rates were slashed but the market continued to fall – just as it had done from the peak in 2000.
I’m afraid it is now time to look at this chart from the other perspective. Stocks have made a major move up, rates have bottomed but rumblings are being made that they will rise over coming months.
Clearly, interest rates and stocks have, during the period in question generally enjoyed a surprising relationship. There was a period from 1995 to 1998 where rates were falling while the market rose but taking simple tops and bottoms in 2000, 2003, and again in 2007 it certainly looks as though stocks and rates have a correlation – and that stocks lead the relationship, not the other way around as is generally touted.
Why would this be – surely rising rates should kill the market, and easing of rates simulate. Isn’t that what we’ve just seen in the recent rally as liquidity from 0% interest rates gushed into the market?
How the Fed ’sets’ interest rates…
http://mises.org/story/2728
Jim Cramer ranting to “cut rates and save the market”:
SPY vs TLT (Bond fund)..
http://finance.yahoo.com/q/ta?s=SPY&t=5y&l=on&z=m&q=l&p=&a=&c=tlt
The yield curve…
http://stockcharts.com/charts/YieldCurve.html
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Commercial bank lending rates are unlikely to drop significantly any time soon. Results released by key players towards the end of last week indicate that interest on lending activities remains the main source of income for banks as they seek to maintain profit growth levels and build on shareholder value. The central bank has repeatedly blamed unidentifed weaknesses in the system for the failure by banks to reduce their rates in line with the regulators prodding using both monetary policy tools at its disposal and moral suasion.
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