“The past is never dead. It’s not even past.” “Requiem for a Nun” (Act 1, Scene 3), by William Faulkner
CONCLUSION AND OVERVIEW
Many times over the past century, significantly increasing United States interest rates have preceded a major peak, or at least a noteworthy top, in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span. The arithmetical (basis point) change has not always been large. Sometimes the yield advance has extended past the time of the stock pinnacle.
The US Treasury 10 year note yield established a major bottom at .31 percent on 3/9/20. Its sustained yield increase thereafter, and especially from 8/4/21’s 1.13 percent, helped lead to the major high in the S+P 500 on 1/4/22 at 4819. After an extended span of engaging in yield repression (and money printing), the Federal Reserve finally recognized that inflation was not a temporary or transitory phenomenon and began raising rates. The timing of a critical interim UST 10 year note yield high, 6/14/22’s 3.50 percent, extended well the stock marketplace peak, as did the UST’s second summit at 4.34 percent on 10/21/22. Arguably, an only gradual reduction of yield repression while immersed in an inflationary environment was one factor for the extensive duration of the yield increase after the S+P 500’s January 2022 crest. In any event, the S+P 500 tumbled sharply in its bear trend, reaching a major bottom on 10/13/22 at 3492, close in time the UST’s high (as well as the autumn 2022 peak in the US dollar). For a bear trend from the long run historical perspective, that nine and one-half months and 27.5 percent decline in the S+P 500 was modest in time and distance terms.
The S+P 500’s rally since October 2022’s valley has carried it to within about 7.5 percent of its glorious January 2022 summit. Given the historic pattern in which UST yield increases “lead” to peaks in key American stock benchmarks such as the S+P 500, do signs of a noteworthy rising yield trend exist on the interest rate front? Yes.
First, the UST 10 year note made several interim lows around 3.30 percent in first half 2023, with yields escalating moderately from 4/6/23’s 3.25 percent. The subsequent UST 10 year high since then is 7/6/23’s 4.08 percent (as of 1200 noon EST on 7/6/23). In addition, the existence of only a modest yield decline from October 2022’s 4.34pc high indicates that the pattern of rising UST 10 year note (and other UST) yields which emerged in March 2020 and accelerated thereafter probably remains intact. Also, core inflation remains persistently above the targets of the Fed and other central bankers. US unemployment remains low. The Fed and other leading central bank luminaries have hinted strongly at further increases in policy rates, and they appear determined (in the absence of an economic crisis) to maintain their tightening schemes for an extended time period. Such boosts in the Federal Funds level (and thus in short term UST instruments) probably will push the UST 10 year yield higher. Moreover, monumental long run federal debt problems confront America; all else equal, huge credit demand tends to boost interest rates.
In addition, the UST 10 year note’s major yield bottom in March 2020 began from a peak around fifteen percent almost 40 years before, in 1981. That seemingly ancient UST yield history does not mandate the development of a substantial yield increase over a very long time span for the ensuing vista commencing in 2020. However, by comparison, a yield increase of about four percent in about two and one-half years, from March 2020 to October 2022, is moderate but not extraordinary, especially given the Fed’s yield repression history (and related money printing) and the developing (and current) inflationary situation. From this perspective, an eventual climb in the UST 10 year note yield above October 2022’s 4.34 percent high is probable.
Therefore, the pattern of rising UST 10 year note yields likely is leading to another peak in the S+P 500. This stock marketplace peak probably will occur relatively soon, probably within the next few weeks or months. However, even if the S+P 500 continues to climb, it probably will not exceed its January 2022 peak by much if at all.
Why might the S+P 500 remain fairly strong in the near term? First, the UST 10 year yield increase since April 2023 has been only moderate. Moreover, in America, and in general for other advanced nations, government yields relative to consumer price inflation remain low or negative. Also, US corporate earnings optimism for 4Q2023 and thereafter is strong. In addition, we live in a nominal world, and quoted stock prices obviously belong in that realm. Real GDP growth can be disappointing. However, all else equal, rising nominal GDP, increasing money supply, and higher nominal prices for goods and services in general will tend to be reflected in higher nominal corporate earnings and stock prices. Stock share buybacks have been substantial. US consumer confidence is fairly high (June 2023 at 109.7, 1985=100; Conference Board). Sales prices of existing single-family homes, after peaking in June 2022, have rallied since January 2023 (National Association of Realtors).
The UST 10 year yield currently is challenging 3/2/23’s 4.09 percent interim high. That perhaps will be sufficient to notably weaken the S+P 500. However, the UST 10 year note yield probably will need to approach or exceed 10/21/22’s 4.34 percent top to induce a very substantial fall in the S+P 500.
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Long Run Historical Entanglement- US Interest Rate and Stock Trends (7-6-23)-1