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Market Oracle FREE Newsletter

Urgent Stock Market Message

Interest Rate Trends Impact on the Dow and FTSE Stock Market Indices

Stock-Markets / Stock Markets 2011 Mar 19, 2011 - 11:46 AM GMT

By: Nadeem_Walayat


Best Financial Markets Analysis ArticleThe consensus view as continuously pumped out in the mainstream financial press and further regurgitated at length in the blogosfear is that rising interest rates will negatively impact upon stock price trends due to higher yielding bonds competing against stock dividend yields as well as acting to suppress economic activity and therefore corporate earnings growth.

However much of this consensus view is perpetuated by highly public perma-bears who have consistently wrongly called for the demise of the stocks bull market of the past 2 years, as they continue to call for an always imminent end of the so called 'bear market rally' despite the fact that the past 2 years has witnessed one of the greatest bull runs in history.

Therefore increasing prospects for a rise in interest rates from record lows as a consequence of bailing out the bankrupt banking sector has prompted the perma-bears to perpetuate the consensus view that rising interest rates will be bad for the stock market which this analysis seeks address.

Interest Rate Trend Forecast

My recent in-depth analysis concluded in the Bank of England acting on only 1 or 2 token rate rises during 2011, as any more would put their bankster brethren under pressure and increase the risk of another financial armageddon.

The lengthy interest rate analysis has been condensed into matrix that is listed at the end of this article.

UK Base Interest Rates and the FTSE 100 Index

The below graph illustrates the trend relationships between the UK FTSE 100 Index, base interest rate and 3 Month LIBOR.

The key point is that there is a greater probability for rising stock prices when interest rates are rising then when interest rates are falling (the exact opposite of the consensus view).

Stock markets tend to bottom and enter into a bull market long before interest rates start to rise, which makes sense in that stock markets are a risk based leading indicator of economic activity whereas central banks are nearly always acting behind the curve to curb the consequences of having kept interest rates too low for far too long and thus have over stimulated the economy as we have witnessed with the Bank of England paralysis on UK interest rates for the past 2 years.

Therefore on its own, the UK base interest rate rising will have no effect on the current stocks bull market. Instead the key danger for the stock market will be when market commentators start to contemplate when interest rates should be cut, the good news is that we are many years away from such a situation which will follow a trend of rising interest rates, followed by an interest rate plateau before rates are again cut, which the mainstream press will at that time wrongly conclude as positive for the stock market.

The Dow and U.S. Interest Rates

My in-depth analysis of near 9 months ago during August warned of the U.S. Treasury bond bubble that was primed to burst and enter into a multi-year bear market (26 Aug 2010 - Deflation Delusion Continues as Economies Trend Towards High Inflation ) since which time US bonds have fulfilled the initial bear market trend as illustrated by the below forecast graph that has quite closely matches the actual outcome that also implied technical bounce would take place from the support area of 115-118 (currently underway).

Dow Consensus Interest Rates Myth Busted

The long-standing widely held consensus view that rising interest rates are bearish for stocks and falling interest rates are bullish, has many concluding that rising U.S. interest rates will be bearish and thus act as another in a series of busted triggers for the long called for bear market to resume.

U.S. 10 Year Rates

The above graph illustrates that rising long yields are accompanied by rising stock prices and falling long yields are accompanied by falling, stock prices after a lag of upto 6 months.

U.S. Short Rates

The above graph illustrates that rising short yields are accompanied by rising stock prices and falling yields are accompanied with falling, stock price trends (after a lag).

The U.S. Interest rate and Dow analysis confirms the earlier FTSE analysis that stock market rallies LEAD interest rates higher rather than interest rates leading stocks which is again another consensus myth that does not match reality. The reason for this is because generally rising interest rates are a sign of a strengthening economy, and falling interest rates are a sign of a weakening economy and thus stocks react BEFORE evidence of economic strength or weakness materialises which is when interest rate decisions are taken as a lagging action. This implies that RISING interest rates WILL NOT HAVE A NEGATIVE IMPACT on the stock market as the STOCK MARKET LEADS INTEREST RATES HIGHER.

  • When interest rates are high - Stocks are in a bubble and Bonds are cheap.
  • When Interest rates are low (like now) Bonds are in a bubble and stocks are cheap (no matter what the P/E ratio's imply or where the index is trading at)

Bottom Line - Rising interest rates are generally bullish for the stock market and given the fact that official interest rates have yet to rise is suggestive of a continuation of the stocks bull market for some time (on the interest rate measure).

This analysis forms part of ongoing in depth analysis that is working towards a stock market trend conclusion for the remainder of 2011 (9 months). Ensure you are subscribed to my always free newsletter to get the full analysis and concluding stock market trend forecast for 2011 in your email in box.

Last In-depth Analysis - 18 Oct 2010 - Stocks Stealth Bull Market Dow Trend Forecast into Jan 2011

Last Interim Analysis - 24 Jan 2011 - Dow Stock Market Index Interim Trend Analysis and Forecast Update

The above analysis is concluding towards probability favouring continuation of the trend higher to the Dow 12k target by early Feb, when the market can be expected to consolidate the advance of the past 6 months and enter into a significant correction that at this point suggests a 10% decline, so tighten the stops and take the ongoing rally to bank profits which is the number one AIM of trading / investing!

Comments and Source:

By Nadeem Walayat

Copyright © 2005-2011 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


21 Mar 11, 16:30
market correction still expected ?

Hi Nadeem. Nice update.

Are you still expecting a 10% correction or do you now assume that isn't going to occur, bar the small correction that Japan caused?



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