The Impact of Interest Rates on Equities

Now that the Federal Reserve has lifted its tightening bias, I wanted to take a look at the impact of lower interest rates on the stock market.

Since 1962, there have been 11,250 days when stocks and bonds have traded on the same day. The yield on the 90-day Treasury rose on 4,845 days, fell on 4,925 days and stayed the same on 1480 days.

On all the days when the T-Bill yield rose, the S&P 500 lost a combined 61.9%. Annualized, that works out to a rate of -4.9% (just capital gains, not dividends).

On the days when the T-Bill yield fell, the S&P gained a combined 1,739.1%, or 16.1% a year.

Interestingly, the market did the best when rates stayed the same. The S&P gained 182.3%, or 19.4% a year.

With long-term rates (10-year T-Bond), the impact is much more dramatic.

The 10-year yield rose on 4,885 days for a combined S&P loss of 98.8%, or -20.5% a year. That’s basically a bear market.

The yield stayed the same on 1529 days for a combined S&P gain of 89.4%, or 11.1% a year.

But here’s the kicker: When the 10-year yield fell (4,836 days), and long-term bonds rallied, the S&P 500 gained an amazing 86,631%, or 42.5% a year.

Probably the most fascinating stat is that all of the stock market’s net capital gains have come when the 10-year yield is 65 or more basis points above the 90-day yield (that happens about 70% of the time). The yield curve hasn’t been that positive in 15 months.

Anything less than 65 basis points, including a negative yield curve, works out to a net equity return of a Blutarsky. Zero Point Zero.

Posted by on March 22nd, 2007 at 8:32 am

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