With this bull market losing momentum, we focus on two concerns. First, consider its age – 1,072 trading days of expansion since March 2009. Though that is less than the 1,154 days of the 2003/2007 bull market, we have passed the 1,059 length of the 1996/2000 growth period.
Secondly, the actual rise in interest rates and the fear that they will continue higher as the Fed steps back from its aggressive policy to enhance the economy.
Interest rates and value move simultaneously, but in opposite directions. Higher interest rates translate automatically into lower capital value. This bipolar relationship holds true for all assets, not just for the price of the keynote 10 Year Treasury debt.
Today’s diagram reveals that hinged relationship between the S&P500 and the 10 Year note. It plots the inverse of that interest rate against the S&P500 ten days later. These parallel paths illustrate, and provide an explanation for, the impact of Fed policy on capital values.
While that relationship always exists, we found the ten-day lag between interest rates and prices simply by eyeballing and curve fitting. Of course the delay between these two factors might be different. Yet, given any lag between interest rate changes and stock prices, today’s rate –the red line- projects future stock prices.
Thus the red line –which shows the interest rate of ten days ago- extends beyond the blue line of current S&P500 prices. Indeed, this diagram forecasts further stock market declines in the future.
DJIA -.84 percent
NASDAQ -1.06 percent
S&P500 -.84 percent
