'Rising rates will be a knockout blow to the stock market.' "Stocks drop as rate worries intensify." (Barron's 9/8/201 - You need a subscription) I keep hearing this type of commentary from market bears and their minions and those who make negative comments on the scant number of bullish posts you see around the web. I have written about this many times in past kortsessions (F/A-Simon Hobbs: Is the market calling the Feds bluff?"). My conclusion has always been that this rising-interest-rate phobia is not supported by facts. So, for the purpose of this post, I thought it appropriate to go back to my personal memory bank to find an extreme example of interest rates going up at the same time stock prices were rising. I also tried to select a period, that if you were living through it today, you would say was very economically difficult and fraught with peril … you know, the same way many view the economy today.
Before I proceed, I must stress a primary reason that I took up the keyboard to write this blog. I do this because, unlike many of my readers, I have lived fifty plus years of market/economic history up close and personal. I can add a perspective that those not born 20 or 30 years ago or those who have not been active in investment pursuits, people building careers, households, raising and educating children could not have possibly attained. If you are concerned about what would seem to be an inevitable rise in interest rates, consider the following.
An Extreme Case: 1974-1982
Fast forward eight years …
January 1, 1982, the rate on the 10-year stood at 14.59%. The S&P was at 122.74, up 75%.
During the eight years, you would have received a total of $0.60 in income for every dollar invested in the Treasury. But you would still not be able to get 100 cents on the dollar of your principal investment back because of the sharp run-up in rates.
However, the dollar invested in the S&P would be worth $1.75 plus your average dividend would have been about 5% (adding another $0.40 to your return.
This was an extremely difficult period to have had the gumption to buy stocks.
The number one reason was that rates were extremely attractive. We had just been through a tremendous market collapse during the early '70s that saw the S&P hit a low of 62.28 (vs. a then all-time high of 119.87). Importantly, the economic/political news backdrop during those 8 years was atrocious:
- We were still trying to extricate ourselves from the Vietnam conflict… finally out in 1975.
- Inflation was running rampant. In 1974, it was 12.34%. The actual peak rate of 13.29% occurred in 1979. By the end of the period, it had tapered to 10.8%.
- The New York City fiscal crisis. The city was on the verge of bankruptcy, which was only averted in 1975 by the Congress providing federal loans and loan guarantees to the city.
- Unemployment was 7.2% in 1974, peaking in 1982 at 10.8% (3/10% higher than the peak achieved during "great recession").
- The Carter Administration, which some claim to have been a disaster (I disagree) ran from 1978 to 1982.
- The 444-day Iran hostage crisis, which ended January 20, 1981, and the second energy crises which it spawned. Oil more than doubled to $39.50/barrel.
So, you think we've got it bad today. Think again! We've survived much worse.
When you hear the so-called experts, pros, your colleagues or a neighbor over the back fence opining about how bad things are, and will be when rates go up, please remember the 1974 to 1982 experience.
Bottom Line: When rates go up, it is not all over! It may not be the End Game, but The Game just beginning.
What's your take?
Disclosure: The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.