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.
- Absolute readings of interest rates were defined as low being below 5%, medium between 5 – 7.5%, and high greater than 7.5%
- 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
Out of Sample Testing Using Robert Shiller’s 10 year data prior to 1970 :
Source : witterlester
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