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There are plenty of things that can keep investors up at night worrying about what could derail the stock market. Rising interest rates should not be one of them.
I get a ton of mailbag questions these days asking whether the Fed will get too aggressive with hiking rates, eventually killing the eight-year bull market in stocks.
The implication is: When rates go up, stocks must go down.
Everyone’s heard this so often it’s accepted as truth. In fact, not a day goes by when I don’t overhear some talking head on CNBC touting this nonsense.
Don’t believe it, because it’s pure baloney.
Last week, I updated you about where we are right now in the big-picture cycle analysis that Larry Edelson pioneered and passed on to us as his legacy. As he correctly forewarned, all the major economic cycles point in unison: A supercycle convergence of historic proportions.
Besides his ardent study of cycles, Larry was also a keen student of history. And he constantly applied historical analysis to his market forecasts. Correctly identifying historical market patterns, sometimes long forgotten, but destined to repeat.
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The upshot? During turbulent periods like this, markets could behave exactly the opposite of what you would expect. You simply can’t afford to rely on old myths about how the markets should behave.
The single biggest myth gaining traction right now is
about interest rates and stock prices.
Everyone seems to believe that when yields move up, stocks will tumble – but that’s total hogwash – nothing could be further from the truth.
Historically most bull markets in equities occur with rising interest rates, not falling rates. Conversely, most bear markets in stocks happen alongside declining interest rates. It is exactly the opposite of what you hear.
Just look at recent history: The Fed has raised interest rates three times since December 2015, and promises more to come, yet stocks are up nearly 15% since the first rate hike.
Want more proof? Let’s take a look at one of the greatest secular bull markets in history: The 1950s and ’60s! Take a look at the charts below and you’ll see what I mean.
The chart at left shows the Dow (top panel) and Treasury yields (bottom) from 1954 to 1962. Above right shows the Dow and yields from 1960 to 1965.
As you can clearly see, stocks and interest rates rose together, not always in lockstep to be sure, but the upward trend in both stocks and yields over the same period is unmistakable.
Treasury yields rose from less than 2.5% to more than 4% over this entire period. If that happened today, the doom-and-gloomers on CNBC would be pounding the table about an imminent stock market crash.
But historically, when this scenario actually played out in the ’50s and ’60s, the Dow soared 279%; stocks went up, up, and away, together with interest rates.
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My warning is clear and unhedged: We are in for five years of chaos in the economy, the markets and in our business and personal lives. As this supercycle courses through the world economy in the months ahead, the investors our governments count on for loans will snap their wallets shut. Even now, investors are reading the handwriting on the wall: Government debt is simply too massive. It can never be repaid. It would be financial suicide for them to continue loaning their money to Brussels, Tokyo or Washington; insane to throw good money after bad. And so, governments — including our own — will simply run out of money. Read more here … – Mike Burnick |
Bottom line: Don’t listen to myths in the financial media about higher rates hurting stocks, it’s simply untrue. Think for yourself, do your own homework, and if you analyze the markets from a historical perspective, you’ll see the hard evidence plain as day.
Interest rates are going up for many years to come, and that is the most bullish thing that can happen to stocks, not to mention commodities!
Good investing,
Mike Burnick
P.S. Stay tuned next week as I dive deeper into the third pillar of Edelson Wave research: Technical Analysis.
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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Market is up because the 10 year is below 3%
Mike, you’re sounding more and more like Larry.
Investors may take the news of further rate increases by the Fed as a positive sign for the general; economy. this would make them willing to pay higher prices for stocks, thereby driving the markets higher. Of course, higher prices will also come in things people need and want for living their lives. This means inflation, which will eventually lead to lower activity in the economy, and a drop in the markets, but this may not happen for some time.
On the other hand, I read elsewhere that the level of margin debt in the markets is up to near what it was before the dot-com bust, and that the growth of credit for all banks has fallen to almost half of what it was before the Trump election victory as the Fed clamps down. Isn’t that kind of scary?
Please publish the AI 3 year charts for gold,silver oil & copper.
Thanks.
Morris
Mike, I agree with you completely. My analyses show that the danger to the stock market is not from rising rates, but an inverted yield curve. In those cases where the yield of the 10-year note rises above the 30-year bond, the market almost always goes down. However, it’s not clear which is the cause and which is the effect. The yield of the 10-year note rises when there is a large demand for this asset because of concerns about the stock market, economy or other worries. Therefore money moving from stocks to bonds, specifically the 10-yerar note, because of fear usually ends a bull market. To see this for yourself, create a spreadsheet where you subtract the yield of the 30-year bond from the 10-year note. Then plot this difference against the S&P 500. In those instances where the difference rises above 0 (inverted yield curve), the market goes down. Look specifically at October 1980, the October 1987 crash, the October 2000 tech wreck and the last half of 2007 housing crisis. Huh, a lot of Octobers!
Could you provide some insight on this “myth”? The IMF may in the very near future institute a change from the USD as the standard currency to a “world currency”, whereby the BRICS nations may gain an upper hand and cause the complete collapse of our USD and its purchasing power. This would also, of course, echo through our stock exchange as foreign investors flee in droves as the USD crumbles.
It seems that for every “expert” who has a successful track record (so they state) reasonably predicting the past events, there is one saying we’re going strong in the market for a while yet and the other other preaching the imminent utter destruction of our dollar, stock exchange, and lifestyle.
I have come to trust Weiss Research and Larry Edelson in particular. As you were mentored by Larry, I would appreciate your valued input on this subject.
Yep, another market canard. Just like increased earnings mean a higher market. Sometimes yes, sometimes no.
If rising interest rates are not a problem, why is the U.S. debt considered to be such a problem? The CBO cites rising rates and that’s supposed to be a major part of the problem. I agree that rising rates are not necessarily a problem, but that’s the theory that’s always out there. It ignores the difference between Eurozone countries, which don’t control their own currencies (they’re currency users) and the U.S. or Japan or China, which are currency issuers, which control their own currencies and borrow in their own currencies and can’t default. And U.S. dollars are held in no small part because they are default-free assets of the U.S. federal government (not state or local governments, which are currency users, like the Eurozone countries). And rising interest rates means more purchasing power precisely for many retirees, whose money can go to hiring younger people who aren’t retired.