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If news headlines of the Fed raising short-term interest rates has you feeling frazzled – particularly in relation to the market – here’s your signal to remain calm.READ THE ARTICLE
Beyond historical context: While many U.S. investors believe they witnessed interest rates moving stock prices down in the early 2000s and also following the 2008 financial crisis, the reality is, a variety of other factors play into the direction stocks go. Typically, investors choose specific stocks based on technical analysis, values-based considerations or simply speculation. Overall, these areas have minimal (if any) ties to interest rates, which shows that stock prices in general don’t always reflect the current value of a company’s future cash flow.
In fact, the past 140 years shows us a -0.21 correlation between 10-year Treasury yields and the price earnings ratio for the U.S. stock market (meaning a very weak correlation). Above all, however, the primary reason you should have skepticism toward any interest rate-market relation is because if they do in fact move each other in opposite directions, then it should work both ways – when interest rates go down, stocks go up – and that is a rare occurrence.
My two cents: You shouldn’t panic over the potential for rising rates moving forward when leveraging historical data; however, that doesn’t mean this time won’t be different. You always need a plan for up, down or sideways markets.