Special guest contribution from I. Bernobul, esq..
JP Morgan Asset Management recently published a correlation chart to which Robert Ross, the smart editor of Yield Shark and Macro Growth & Income Alert, a Mauldin Economics service, appended his own conclusion that “stock returns don’t tend to turn negative until rates hit 5%” (red square added to original chart).
The appended chart was published in the very popular Mauldin Economics’ CHARTS that MATTER and even though Ross warned that
Today, however, interest rate risk is elevated due to a US debt load that is higher than it
has ever been. And that could spell trouble for the markets even at a 3% 10-year rate.
the chart itself was highlighted as evidence that rising bond yields historically did not bother equity markets.
The chart, covering more than half a century, has a pretty convincing look.
But I instinctively and intuitively sensed something wrong with it: it just does not make any financial sense that equity values would be less rate sensitive at lower levels.
It turns out the chart, and Ross’ conclusion from it, are quite right but only because the period covered, May 1963 to March 2018, excludes years of low interest rates that actually invalidate Ross’ interpretation. Treasury yields were below 5% only 35% of the time since 1963, of which 85% occurred since 2001 with the housing bubble leading to the Great Financial Crisis and the period since 2009 when central bankers totally dominated the interest rate space.
Here’s a chart covering 1927 to 1967, forty years during which Treasury yields remained below 5%, showing 8 periods when rising Treasury yields coincided with difficult equity markets. There is no automatic relationship here and while there are periods when equities do ride along with rising yields and economic expansion, the reality is that rising yields eventually negatively impact equity values. There is no strict rule on this relationship.
As Mark Twain said, facts are stubborn, but statistics are more pliable. For facts, I suggest this post: RISING LONG-TERM RATES: THE SCARY FACTS!
1 thought on “CHARTS THAT BOTHER”
I’ve found the trigger for rates is when the 10 yr yield makes a new 36 month high. Not perfect (what is), but generally it’s tough sledding until either stock drop or, as usually happens, rates drop enough that they take a long time to go back to a new 3-yr high.
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