The Importance of Interest Rates

by: Eddy Elfenbein

Eddy Elfenbein submits: On Tuesday, the Fed will make its big decision on interest rates. If you’re new to investing, the direction of interest rates is extremely important to the stock market.

Stocks love falling rates, but rising rates act like Kryptonite. Consider these numbers:

Since 1960, the yield on the 90-day Treasury bill has risen on 1,201 weeks. If we isloate those weeks, the market has climbed a total of 144% which works out to 3.9% a year. But on the 1,107 weeks when rates have fallen, the market has climbed over 650%. That comes to 10% a year, or 2.5 times better than when rates are rising.

Rates have stayed the same on 121 weeks for a total return of 16.5%, or 6.8% annualized which is almost the exact average of the other two categories.

Short-term rates hit their lowest point on June 19, 2003 at just 0.79%, and have risen ever since. Since then, the S&P 500 is up 28.6% or 8.4% a year.