Interest Rate Regimes and Stock Market Performance

March 23, 2011

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Wayne Whaley conducted a study comparing interest rates and stock market performance, extending back to 1970.

  • used the 3 month T Bill, 5 Year Note, and 30 Year Bond, classifying the curve as increasing, decreasing, or flat
  • rising or declining interest rates were defined as a 10% change in the average interest rate in a 6 month period
  • Declining rate regimes produced a 16.31% return in equities, twice the 8% average annual return
  • Increasing rate regimes produce a negative (0.91%) return.

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  • Absolute readings of interest rates were defined as low being below 5%, medium between 5 – 7.5%, and high greater than 7.5%

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  • Combining the two, when rates are low but rising rising, equities produced an expectedly strong 13.2% return
  • Notably, when rates were above 5% and declining the average return has been 22.89%.
  • High rates and rising interest rates produces the worst return of negative (5.07%)
  • Over the last 40 years, one would have experienced a 19.7% return being only invested in the 9.7 years in which interest rates were doing one of the following
    • interest rate above 5% and declining
    • interest rate below 5% and rising

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Out of Sample Testing Using Robert Shiller’s 10 year data prior to 1970 :

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Source : witterlester

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