Will Rising Bond Yields Send Stock Prices Tumbling?

Conventional Wall Street wisdom says “rising rates are bad for stocks.” Let’s put that belief to a test.

By Elliott Wave International

One of the big financial news stories on April 24 was that the 10-year Treasury yield hit 3% for the first time since 2014.

The other big financial news story was that the DJIA closed 424 points lower on that day.

As you probably know, the conventional wisdom on Wall Street is that investors will sell stocks in favor of bonds when yields reach an attractive level. So, it’s not surprising that many pundits blamed the DJIA’s triple-digit decline on rising bond yields.

Here’s a sample April 24 headline along with higher bond yield warnings from the past few months:

• Here’s the threat to the stock market from rising bond yields (Marketwatch, April 24)
• Rising bond yields could win next round in battle with stock market (CNBC, Feb. 7)
• How Spiking Bond Yields Could Topple a Stock Market Rally (Bloomberg, Feb. 4)

But, is the conventional wisdom that says higher bond yields will send stocks lower correct?

Well, our research reveals that there is no consistent correlation between interest rates or bond yields and the stock market.

Take a look at these charts from Robert Prechter’s 2017 book, The Socionomic Theory of Finance:

The book notes:

Figure 2 shows a history of the four biggest stock market declines of the past hundred years. The graphs display routs of 54% to 89%. In all four cases, interest rates fell, and in two of those cases they went all the way to zero. … [Conversely, Figure 3 shows when stocks climbed as interest rates climbed].

[Yet,] there have been plenty of times when the stock prices rose and interest rates fell. It happened, for example, in the period from 1984 to 1987, when stock indexes more than doubled while interest rates fell by half, [as Figure 4 shows].

[Looking at Figure 5,]. there have also been times when stocks fell and interest rates rose, as in 1973-1974 when stock indexes dropped nearly in half as interest rates doubled.

So, you can see why it’s folly to forecast the stock market based solely on the direction of rates. What’s more, this lack of “cause and effect” doesn’t just apply to interest rates.

In fact, our research shows that there is not a single factor outside of the stock market itself that determines the trend of aggregate stock prices.

Elliott Wave Principle, the Wall Street classic book by Frost & Prechter, says:

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own.

We call that law the Elliott Wave Principle.

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This article was syndicated by Elliott Wave International and was originally published under the headline Will Rising Bond Yields Send Stock Prices Tumbling?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.