The market, higher for the second consecutive session, scored the highest daily percentage gain since August 22. But oddly, interest rates also increased to their highest level in the last eight days. ‘Oddly’ because the math shows, and everybody knows, that interest rates and stock prices move in opposite directions.
Further, all this happened on the very day on which the Fed reported that GDP and the economy are growing at a “modest to moderate pace.” Given the recent and continuing hints by the Fed that it would let interest rates float to higher levels once the economy’s pace picks up, the commonsensical expectation would for a retreat in the stock prices.
Today’s diagram plots the paths of the S&P500 and value of the Ten Year U. S. Treasury since July. (This ‘value’ is the inverse of the Ten Year Treasury interest rate; an increase in the interest rate is equivalent to a decrease in its value.) It shows very clearly their preponderant parallel movements.
Indeed, today’s stock gains and higher interest rates are a continuation of their divergence in recent days. Nevertheless, expect an end to this conflicting combination; eventually, these two series will return to their historical and arithmetic relationship: higher interest rates translate into lower equity prices.
DJIA .65 percent
NASDAQ 1.01 percent
S&P500 .81 percent
