Many investors believe falling interest rates are good for stocks, and rising rates are bad for stocks.

 

The thinking goes like this: bonds compete with stocks for investors’ money. If yields fall, investors should rush back into equities, and if yields rise, stocks become less attractive.

 

It sounds reasonable.

 

But history shows stock market trends do not hinge on the direction of interest rates.

 

Our October 2020 Global Market Perspective highlighted a striking example where conventional wisdom simply didn’t hold:

These two charts illustrate the fallacy in the pervasive belief that falling interest rates are a big boost for stocks. Ten-year interest rates in Spain have dropped from 4% in 2007 to nearly 0% today. Yet the broad market IBEX plummeted almost 60% over the same span. In Portugal, 10-year rates crashed to 0.24%. Despite an overall decline in borrowing costs, the PSI-20 is down an astounding 71% over the past 21 years:

So much for “lower rates = higher stocks.”

 

Interest rates don’t drive stock market trends. That belief is a market myth – one of many.

 

 

 

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