Do Rising Rates Really Signal Strong Growth and Rising Equity Prices? – Irvine Real Estate – Irvine Homes for Sale

by Robert Mack on January 3, 2011

in Buyers, Latest News, Sellers

The current fad of those on Wall Street is that rising interest rates are signaling strong economic growth and thus will lead to rising equity prices. Looking at the correlation over the past decade between interest rates and equity prices it would seem that thesis has some merit. However, as the latest monthly commentary from the Contrary Investor points out, the 40 year period from 1960 – 2000 tells a very different story.

Where a correlation exists between equity prices and interest rates (indicated by the 10 year treasury) during that period, it has overwhelmingly been a negative one. For example during the 1980′s the only time equity prices and interest rates moved in a positively correlated fashion, ie they both went up together, was in 1987 and we know how that worked out. Similarly the only time in the 1990′s that interest rates and equities went up together was 1999.

Thus the latest Wall Street fad is predicated on the back of the previous decade that saw equities cut in half twice and a generational plunge in home prices. Is it a coincidence that the entire period of the last decade where a positive correlation between equity prices and interest rates existed was one in which the Fed was overly accommodative? Or less politely put, blowing bubbles? Is that not what we have now, as the Greenspan put has seamlessly transitioned into the Bernanke put?

Another important point from the contrary investor worth considering before buying into the ‘rising rates equals strong economic recovery’ story:

via seekingalpha.com for the complete article

Are the rising interest rates signaling growth in the market place? Will equity increase as interest rates go up? What are your thoughts…..

Posted on Irvine Orange County Real Estate Market News

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