On August 6, 2020, we published an article about the trend in interest rates and our expectations for the future. In this posting, we’ll attempt to address the impact of interest rates on bank stocks in a secular rising trend. We’ll provide real world example to highlight the good, bad, and ugly.
All of our work is based on precedent rather than theory. If the conventional wisdom is that stock markets fall when interest rates rise then we check the interest rate cycle and confirm the claim. If the “wisdom” doesn’t hold up we reject the claim and provide evidence.
Interest Rate Cycles
In the case of interest rate cycles, the secular trend is so long that people generally take what they see in the last 30 years and use that as the template for their analysis going forward. Unfortunately, the interest rate cycle, a full peak to peak or trough to trough, is 54 years or more. To gain more background, we refer to wholesale price from 1790 to 2006.
The above chart is from the 1947 book Cycles: The Science of Prediction by Edward R. Dewey and Edwin F. Dakin. Notice how it was predicted that the cycle peak would occur in 1979 (actual 1980) and the cycle trough was predicted in 2006 (actual 2008). These are good reference markers for assessing the quality of analysis.
If, according to Dewy and Dakin, the last secular rising trend was from 1952 to 1979, it would be helpful for us to review the performance of bank stocks in that period to better understand the impact of rising rates. Below, we have provided data from within the rising rate environment to see what the potential outcome could be for bank stocks going forward. Continue reading
