December 07, 2011 - Do Low Interest Rates Power Stocks Higher? - By Elliott Wave International
Back in the day, one of the first things I "learned" about investing was that low or declining interest rates are good for stock prices.
I've since had to "unlearn" this.
Alas, a certain market commentator recently reminded me of the "lower rates equal higher stocks" myth. He opined that stocks aren't being kept afloat by hopes for a European debt solution, but then claimed that the real reason to be bullish is very low interest rates.
Yet is the near-zero rate on T-bills the reason stocks have held up since early October?
"[The chart below] shows a history of the four biggest stock market declines of the past hundred years. They display routs of 54% to 89%. In all these cases, interest rates fell, and in two of those cases they went all the way to zero! In those cases, investors should have traded all their bonds for stocks. But they didn’t; instead, they sold stocks and bought bonds." Elliott Wave Theorist, February 2010
Have a look at the chart:
From the evidence, dear reader, you can see why the notion that low interest rates and a rising stock market almost always "go together" is just not accurate.
Now, we do know that stocks can fall when interest rates are high:
"The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value Line Index dropped 74 percent. Economists all draw upon this experience, but they ignore the others. Today's environment of extensive investment leverage and an Everest of debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s." Conquer the Crash, second edition, (pp. 429-431)
Interest rates do not dictate the market's price pattern -- nor does any other event outside of the market itself.
The market has a life of its own, as revealed by the Elliott Wave Principle.
That principle helped us forecast the March 2009 market bottom, and now it's giving us an equally important message.
Read our latest analysis and market forecasts risk-free in our Financial Forecast Service by following the link.