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Will A Spike In Rates Hurt Stocks? (Spoiler Alert: Yes)
The current consternation among global equity markets is centered around the recent considerable rise in bond yields globally. There seem to be equal numbers of folks who believe this development to be a legitimate threat and those who believe it’s just another distraction. Which camp are we in? As always, we prefer to take a quantitative, historical view of the matter (though, ultimately, we will let prices tell us whether or not to worry). We have looked at the spike in yields from a couple angles already in this blog, including concurrent short-term lows in the Russell 2000 and Treasury bonds (may be a short-term concern for stocks) and a negative divergence in corporate bonds versus equities (may be an intermediate-term concern). Today, we take another look at the issue within the context of the swift reversal in 10-Year Treasury Yields (TNX) recently and the effect this type of move has had on stocks in the past.
First of all, there are countless ways of defining the current interest rate “spike”, from the subjective to the quantifiable. Even in the quant category, there are endless ways of looking at the move. In order to stay objective, one has to draw the line somewhere in the definition of the spike. In this case, we kept it pretty straightforward, focusing on the extreme reversal of fortunes in the bond market. Specifically, we looked at prior occurrences when rates demonstrated the precise behavior as this recent move, going from a 52-week low to a 5-month high within a 4 month period.
Since 1962, this is just the 15th unique occurrence. The previous 14 took place in the following months (using the earliest date when there was a string of occurrences):
- May, 1967
- May, 1971
- May, 1976
- June, 1983
- June, 1991
- March, 1992
- January, 1994
- March, 1996
- May, 2001
- December, 2001
- March, 2002
- July, 2003
- June, 2008
- December, 2010
Collectively, the impact of the reversal spikes in yield has not been kind to equities. The version on the chart may be difficult to see so here is a larger performance table on the S&P 500 following such events.
As the table shows, similar spikes in TNX have been rough on stocks, from the short-term all the way out to the long-term. Looking at the 6-month mark, for example, just 5 of the 14 prior occurrences showed a positive return. The median return was -2.2% and the average return was twice as bad. Looking out a full year, the average return was still negative. This is pretty significant underperformance, statistically, even if the sample size is limited.
These results lend credence to the argument that the spike in yields is a poor omen for stocks. That said, as always, there are exceptions to the rule. For example, the 1996, 2003 and 2010 occurrences saw no downside over any period following. Although, one might say the 2003 event bears little resemblance to the present as stocks were just emerging from a cyclical bear market at the time.
At the same time, however, the 2001-2002 and 2008 instances which contributed significantly to the poor overall results in the table differed from our current market as well. They occurred with the market well off of its highs as stocks were already knee-deep in developing bear markets. Incidentally, those events were the only ones that did not occur with the S&P 500 within about 3% of its 52-week high. Therefore, many of these precedents do, in some ways, resemble current conditions.
There will always be reasons to discard similar historical market events as irrelevant. Many of the reasons are likely sound as well, including the simple fact that no two markets are ever alike. However, various market patterns do repeat throughout time, whether due to an existential economic or market lifecycle or to the human natural tendency to respond to stimuli in a similar manner. Thus, we would not be so quick to dismiss historical precedents, or the lessons they contain, which bear some resemblance to present market conditions.
Accordingly, the recent spike in bond yields would appear to have historical evidence to back up those who harbor concerns about its potential negative impact on stocks – a negative impact that may be of a long-term nature.
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If I borrow I pay a vig from printed fractional reserve ponzi bullshit. Making banks pay a vig to mother bankster, why should I give a shit.
What if they raise rates and the machines keep printing green numbers on the screen? If someone is arguing the market is connected to the economy and bad news will be bad news, they haven't been paying attention.
The MATRIX apparently matters to the illusionists. Whoa unto those that seek their salvation thru false gods. Whoa unto them...
Hey Tyler
Why is the euro surging?
Not Tyler, but the headline would read Euro QE is "working", economies are "growing", Greece as an issue is marginalized, as is the Ukraine. Anti-EU parties UKIP, and the others have been shown to not be relevant. Its the best grapefruit in the dump right now. I would also suspect but cant substantiate that the Saudis/ Russians/Chinese are accelerating the rotation out of the dollar, and the Japs are buying (hence the yen is holding relatively).
Prolly cause i spent $1000 over there last week, picked up some junk metal too, price went from $14 a pound to $4, over night, guess they don't want me to have money.
Our down home economy is real. THe market is fantasy fucking island. Little midget says "the plane, the plane".
Critical thinking in our heads go; "the plane is crashing, the plane is crashing"
Still just a fantasy. Til we are hungry, tired and gasping for air.
VOLKER THIS SHIT SHOW!
I know the pieces fit..
The Fed Encouraged Packing TNT round the Blazing Ponzi Fire-Pit - The Impending Explosion is no Accident
http://econimica.blogspot.com/2015/05/the-fed-encouraged-packing-tnt-round.html
'A negative impact on stocks of a 'long term' nature'....I'd guess 24 hours is what he means by long term?
It's certainly a sliding scale. Could mean 2 hours.
< no rate increase this year.
< rates will go up sometime this year (2015).
Bonds and stock have moved roughly together since 1981- stocks up, yields down (bond prices up). What makes anyone think they are suddenly going to become negatively correlated asset classes for anything but short periods of time?
The country (and certainly our Feral Government) can not survive higher rates. When they move up in any meaningful way, the wheels fall off.
This is why I believe we (and everyone else in the developed world) are going to choose the Japan path. It's the only one that can go on for a long period of time with the least amount of damage to the most vested interests. Except savers, of course, but who gives a crap about people who set aside for a rainy day when the whole economy is about debt and consumption using pretend fiat money. Fuck 'em.
Short term there should be a knee jerk in refi's, with the last folks jumping on, but after that Housing and the Refi business will die even on the .25 point that mortgages have risen....
Food eating Food all 'round the pen. Fat get fatter and the thin get thinner one way or another. Of course, the direction can suddenly reverse.
Unfortunately, the math is what it is and the carrying capacity of the earth is what it is...
there can only be one "Japan". The supply lines, and the middle, will not hold much longer.
If they don't generate some jobs and wage growth, there's going to be trouble.
lol @ spike in rates. lol @ anything hurting stocks
^^^this. The "official" numbers will say that everything is awesome, in reality it will be mexico city everywhere.
interesting times...
I don't think you can compare Post-2008 to Pre-2008. Prior to 2008 the markets were driven (more) by fundamentals. Post-2008 the largest sell-oofs in Treasuries took place at the start of QE1,2, and 3.
Typically you would expect a large sell-off in Treasuries as the Fed begins a rate hike cycle as the market orices in higher rates. The impact of Fed hikes on longer-dated securities starts to fade towards the end of the fed hike cycle as the market begines to believe the Fed has "done enough". Towards the end of the Fed Hike cycle you get the longer end steady or even falling with the last couple of rate hikes.
Given the current state of the US economy (dismal) it seems unlikely that the market would start to price in a "normal" series of rate hikes. The post-2008 environment is not "normal", as shown by ZIRP. So the "first" hike by the Fed is more likely to be interpreted as the "last" hike, and any sell-off in long-term bonds would probably be a buying opportunity.
The Fed is not completely insane and has probably realized that ZIRP/QE isn't doing what it was supposed to do. So under cover of "improving" employment they will try to "normalize" rates, hike once and try to manage the impact on Equity markets. If they can get one hike in they will try another and another. I expect after one hike they will realize they are well and truly fornicated.
well said.
but she forgets that central banks are BUYING equities. which is probably why OUR fed doesnt want to be audited.
a day like today proves its tough to be a bear. they will do everything in their power to maintain the illusion/status quo.
and that, no doubt, is a lot.
There are no longer any rules, tendencies or historical comparisons. There are only printing presses and keystrokes. Until that fails too. Then? No one knows.
Now, if I add up all the SPX # (3rd row 1st chart) it's 55. Seems we are discussing 8 x 14 samples = 112 ?
OK, 55 / 112 = 49.1 % up, 50.9% down. Yikes!
Or.... uh, something else.