Over the last few days the market has rallied on hopes that the Fed stands ready to take steps to lower interest rates if the need arises. While the prospect of lower interest rates seems to always act as an elixir for equity prices, the reality is that every leg lower in long-term interest rates since March 2009 has been accompanied by a drop in equity prices.
The chart below compares the S&P 500 to the yield on the 10-year US Treasury going back to March 2009. As you can see, the S&P 500 has seen a big gain during this period, while the yield on the 10-year has dropped. At first glance, it would appear as though lower rates equals higher stock prices. If you look more closely, however, you can see that virtually all of the gains have come when the the yield on the 10-year was rising, while each leg lower in interest rates (shaded areas) has also seen a leg lower in stock prices.
Granted, there are a lot of factors at play in this relationship, so it is not so black and white, but in an environment where investors flee to Treasuries at the slightest whiff of weakness, maybe what the market needs is some confidence so that investors feel comfortable moving out of Treasuries.