The secular trend for interest rates is clearly up after declining since April 1981.
There are “experts” on the topic of interest rates and the stock market claiming that the Federal Reserve policy of “artificially low” interest rates is the reason the stock market is up since the low of 2009 and as a supplemental proof of their lack of knowledge, the “experts” include the Dow increase from the 2001-2003 lows as the devil’s handiwork. These same “experts” also claim that the stock market will crash if rates start to go up.
Yes, stocks can go down as a function of rising rates. However, this needs to be put in context of the overall market. As we start to emerge from a secular declining trend, from 1981 to 2008, to a secular rising trend, from 2008 to 2035, the only comparisons of the current rising trend can only be done to the last secular rising trend from 1942 to 1981.
The “experts” claim this time is nothing like the postwar economy that led to the rate peak in 1981. We’ll have to wait and see, for now the following data stands in opposition of the “experts.”
The Data, So Far
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3-month Treasury goes from 0.32% in April 1942 to 2.23% by October 1955.
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Dow Jones Industrial Average goes from 91.92 in April 1942 to 438.59 by October 1955.
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Dow Jones Utility Average goes from 10.58 in April 1942 to 61.48 by October 1955.
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3-month Treasury goes from 0.31% February 2016 to 2.23% by October 2018.
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Dow Jones Industrial Average from 15,660 in October 2015 to 26,447 by October 2018.
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Dow Jones Utility Average goes from 614.03 to 733.73 by October 2018.
Summary
Rates up, market down? Nope! Even the Dow Jones Utility Average squeaked out a gain of +19.49% when they should have been crushed by rising rates. Is there a severe underperformance of the market under the current conditions compared to the last secular rising trend? Absolutely.
We believe the secular trend to rates will continue higher and the markets will follow, up to a certain point. We’ve outlined our expectations for the Dow Jones Industrial Average in our January 3, 2018 article titled “Dow 130,000 by 2032.” What is going to happen next with rates and the market? These are the scenarios to contemplate.
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Markets come up and rates go down.
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Markets continue to underperform and rates rise.
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Markets come down and rates go down.
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Markets unchanged and rate go up.
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Markets unchanged and rates unchanged.
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Markets rise and rates unchanged.