The Effect of Lower Interest Rates on Equities

Eddy Elfenbein submits: Now that the Federal Reserve has lifted its tightening bias, I wanted to take a look at the impact of lower rates on the stock market.

Since 1962, there have been 11,250 days when stocks and bonds have traded on the same day. The yield on the 90-day Treasury rose on 4,845 days, fell on 4,925 days and stayed the same on 1480 days.

On all the days when the T-Bill yield rose, the S&P 500 lost a combined 61.9%. Annualized, that works out to a rate of -4.9%.

On the days when the T-Bill yield fell, the S&P gained a combined 1,739.1%, or 16.1% a year.

Interestingly, the market did the best when rates stayed the same. The S&P gained 182.3%, or 19.4% a year.

With long-term rates (10-year T-Bond), the impact is much more dramatic.

The 10-year yield rose on 4,885 days for a combined loss of 98.8%, or -20.5% a year.

The yield stayed the same on 1529 days for a combined gain of 89.4%, or 11.1% a year.

But here’s the kicker: When the 10-year yield fell (4,836 days), and long-term bonds rallied, the S&P 500 gained an amazing 86,631%, or 42.5% a year.