Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

Stock-Markets

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: http://www.marketoracle.co.uk/Article27038.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2011 Marketoracle.co.uk (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. http://www.marketoracle.co.uk

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

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

jonnysingapore
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?

thx

js.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in