Permanent Value

Week in Review 8/12/13

Bruce Doole
August 12th, 2013

Rising Stocks & Rising Rates: It’s Not Uncommon

Rate increases during the early and middle phase of an economic expansion are the natural result of improving business conditions and strengthening demand for capital. Yield increases typically don’t become hostile to the stock market until the latter phase of the economic cycle, when they’re accompanied by acceleration in inflation and by even more rapid increases in short-term interest rates.

The Aftermath Of Past Episodes

With the current episode of stock market gains and bond yield increases approaching the “typical” or historical median experience, the obvious question is, “What has happened in the aftermath of past episodes?” Do stock prices continue higher while interest rates flatten or fall? Or, do further rate increases finally begin to pressure the stock market?

Stocks have generally been weaker in the 13-, 26- and 52-week periods after interest rates and stock prices finally become untethered. Bond yields, on the other hand, did not exhibit a clear directional bias in the periods immediately following the 11 episodes. One year after stock prices and bond yields had “decoupled,” yields on the 10-year Treasury had moved lower in six instances and higher in the other five.

In sum, while bond yields remain extremely low by historical standards, the current episode of jointly rising yields and stock prices is fairly mature by historical standards.

 

Source: Leuthold Weeden