1994, Rising Interest Rates, And Your Approach To The Markets

Mar. 21, 2014 12:06 AM ETGLD, IEF, QQQ, SPY, TLT, DIA, IWM9 Comments
Chris Ciovacco profile picture
Chris Ciovacco


  • Janet Yellen’s remarks Wednesday brought rising interest rates back into focus.
  • If the bond market reacts and interest rates spike as they did in 1994, it could spell trouble for both stock and bond investors.
  • If 2014 proves to be more challenging than 2013, the sharp gains in stocks that occurred in 1995 highlight the importance of sticking to a disciplined risk management approach.

Rising Rates: Speed Kills

Janet Yellen's press conference Wednesday brought a Fed rate increase into the market's field of vision. Intermediate Treasuries (IEF) have dropped 1.08% this week. When bond prices fall, interest rates rise. Rising interest rates are typically a good sign for the economy and stocks, but one of the exceptions is when interest rates rise too quickly. A 2013 Wall Street Journal article touched on the prospect of a spike in interest rates:

The recent spike in rates conjured up fears of a bursting bubble in bonds, a rapid and disruptive increase in interest rates that would produce big losses for individuals and institutions with big bond portfolios and raise borrowing costs across the economy. There were more than a few references this week to 1994, when Alan Greenspan's Fed raised short-term rates after a long hiatus, bond markets around the world tanked and Orange County, Calif., ended up in bankruptcy court.

1994: Ugly Period For Stocks and Bonds

Since a picture is worth a thousand words, the chart below shows what a very sharp spike in interest rates looks like.

The next chart shows what a very significant spike in interest rates can do to your stock portfolio. The S&P 500 dropped 7% during the first quarter of 1994.

Could Stocks Struggle In 2014?

If rising interest rates become the dominant theme, it is possible 2014 traces out a consolidation look similar to the one shown below.

If 2014 turns out to be a sideways year for stocks, it is important to understand what that means. Markets that trade within a range, or consolidate, are a reflection of a fairly even battle between economic bulls and economic bears. Sideways markets are difficult and frustrating for stock investors; that is the bad news. The good news is the longer the period of uncertainty lasts, the

This article was written by

Chris Ciovacco profile picture
Chris Ciovacco is the founder and CEO of Ciovacco Capital Management (CCM), an independent money management firm serving individual investors nationwide. The thoroughly researched and backtested CCM Market Model answers these important questions: (1) How much should we allocate to risk assets?, (2) How much should we allocate to conservative assets?, (3) What are the most attractive risk assets?, and (4) What are the most attractive conservative assets? Chris is an expert in identifying the best ETFs from a wide variety of asset classes, including stocks, bonds, commodities, and precious metals. The CCM Market Model compares over 130 different ETFs to identify the most attractive risk-reward opportunities. Chris graduated summa cum laude from The Georgia Institute of Technology with a co-operative degree in Industrial and Systems Engineering. Prior to founding Ciovacco Capital Management in 1999, Mr. Ciovacco worked as a Financial Advisor for Morgan Stanley in Atlanta for five years earning a strong reputation for his independent research and high integrity. While at Georgia Tech, he gained valuable experience working as a co-op for IBM (1985-1990). During his time with Morgan Stanley, Chris received extensive training which included extended stays in NYC at the World Trade Center. His areas of expertise include technical analysis and market model development. CCM’s popular weekly technical analysis videos on YouTube have been viewed over 700,000 times. Chris’ years of experience and research led to the creation of the thoroughly backtested CCM Market Model, which serves as the foundation for the management of separate accounts for individuals and businesses. Copy and paste links into your browser: Market Model: http://www.ciovaccocapital.com/sys-tmpl/ccmmarketmodel/ More About CCM: http://www.ciovaccocapital.com/sys-tmpl/aboutus/ YouTube: http://www.youtube.com/user/CiovaccoCapital Twitter: https://twitter.com/CiovaccoCapital CCM Home Page: http://www.ciovaccocapital.com/sys-tmpl/hometwo/

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