Here's What Stocks Think of Higher Rates
You'd be forgiven for having missed the rise of longer-term interest rates in the US with all that is making headlines presently. In fact, the US 10Y-2Y yield curve is the steepest in almost 5 years. Why is this important you ask? Well, it depends on who you ask. Bulls will tell you it's a sign of recovery, and the bears will tell you this is the beginning of decline in stocks. Sentiment Trader recently shared their analysis, so I decided to take a look myself.
In this week's chart we take a look at how stocks have performed the last time we saw rates as this intersection. The chart begins when the US Federal Reserve began targeting the Fed Funds rate. I've shared charts in the past where I explain the significance of the long-term minus short-term rates here.
During the early 90's, it's almost like rates had no impact on stocks. We saw stocks rise as rising rates were a sign of a stronger market. However, in 2001 and 2007, when we saw the second and third intersection of rates, it had severe implication for stocks. During 2001, the stock market took almost 5 years to get back to it's 2001 levels, and in 2007, around 6 years to get back to 2007 levels.
As long-term rates rise during 2021, are we setting ourselves up for a period of decline in stocks, or are we preparing ourselves for a 1991 like bull market? There are so many factors that are were not present in prior periods, and so many new influences being born out of the pandemic. My personal feeling is we'll see a roaring 20's like boom, the one we saw post the Spanish Flu, and just before the Great Depression of 1929. Time will tell.