Increase in Interest Rates - Good for the Stock Market?

Nov.18.09 | About: SPDR S&P (SPY)


If you look at the prime rate and the Standard & Poor's 500 since January of 1992, you will notice a trend of increasing prime rates and increasing stock prices. During 1992 and 1993, the prime rate was flat at 6% with the market not doing much, trading between 415 to 450. Then in April of 1994, the prime rate started moving up, eventually hitting 9% a year later. The S&P 500 began to make its move during that same time frame.

The prime did take a dip in the late 1990s, dropping below 8%, but in June of 1999 it turned right around and shot up to 9.5%. A lot of investors remember what happened near the end of the year 2000; the market began its long severe decline, the famous dot com crash. During that same time frame, the prime dropped from 9.5% to 4% before bottoming out in July of 2003.

The years 2004 through 2007 marked an increase in both the market and the prime. But in the summer of 2007, the prime started tanking again going from 8.25% all the way down to 3.25%, with the market following closely behind, having its biggest, sharpest decline in recent history.

The prime rate has been flat this year. Will it go up soon? If it goes up, will the market continue its recent rise? Watch what happens.