Worried About Stocks? A Little History That Might Help You Sleep Better

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by: Bill Kort

We have seen this movie before...

And many times. The United States Treasury 10-year note breaching a 3% yield (peaking last week at 3.248%) after another quarter point bump in the Fed funds rate (to 2.25%) has rattled the market again. "Again" is the operative word. This happens every time that the Fed moves rates to the upside and it is fed by the media who inevitably ascribe the end of the economy's good times to rate increases. They do this even though there is significant evidence to the contrary, both on a longer-term historical basis and in more recent history.

A Historical Example (1-1-1975 To 12-31-1982)

The Dow Jones Industrial Average began the year 1975 at 616.24. December 21, 1982, the index closed at 1046.35, up 70%. During that same period, the interest rate on the 10-year US Treasury note jumped from 7.5% to 14.59% (1/1/82). CNBC et. al. please explain.

Recent History (The Past 5 Years)

On December 18, 2013, the Fed began the tapering of Quantitative Easing (QE), its $85 billion/month bond-buying effort, put in place after the 2008 financial crisis. Buying bonds was done to put upward pressure on their prices, keeping interest rates low to help the ailing economy. When the tapering began many were calling for dire consequences (pushing the economy back into recession or worse). The interest rate on the 10-year spiked to 3.01%.

The Fed was saying all along not to worry and that it would move in a very deliberate, 'data-dependent' manner. It was true to its word. The taper of QE ended in October 2014, and the Fed did not begin to raise the funds rate until December of 2015. Both the taper and initial bump in the Fed funds rate caused considerable turmoil in the market. The Fed's goal was not to slow the economy but to normalize rates after a period of extremely low rates.

Since December 2013, the S&P 500 has doubled. The Fed Funds rate is up from .25% to 2.25%. Interestingly the rate on the 10-year just broke above its high of five years ago last week, trading as high as 3.248% (up only 25 basis points in the past 5 years). It would appear a little perspective (A Little History) goes a long way toward soothing the nerves. CNBC et. al. please explain.

Bottom Line

Rising rates in the face of a stronger economy is not a sign of bad things to come. As I have said before, The Fed's goal was not to slow the economy but to normalize rates after a period of extremely low rates. This still appears to be the policy.

What's your take?