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« Weighing the Week Ahead: Will “Good News” be Good for Markets? | Main | Weighing the Week Ahead: Can Earnings Growth Propel Stocks Higher? »

January 08, 2014

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oldprof

John - I don't think really old data enlightens us much.

You are correct in observing the general trend of rates during that time, but there were some fluctuations.

I am aware that some sources are attempting to dismiss inferences from the entire time of falling interest rates. In general, these observers saw that as a great time to buy bonds -- not recommending stocks. If you follow my links, you will see that the reason for ultra-low rates is skepticism about earnings and deflationary fears.

We are now seeing the reverse.

I guess we'll soon have more data, but I am interested in the reasoning behind the alternative viewpoint.

Jeff

john

Hey Prof,

I believe we are talking about 2 different things. Your data shows S&P return as a function of prevailing 10y tsy yield.

What I (and the 3rd sophistry) am asking is, what is the S&P return plotted against change in yield over time.

For example, is S&P return same when going from 3.2 to 3.5% over a month vs. going from 3.8 to 3.5%. intuitively i think no.

If you look at the FRED data from 1963 to 2013, yield started at 4% while in an uptrend. It peaks at 12% in 1983. Since then it has steadily fallen, passing 4% mark during the naughts, finally bottoming at 1.5% in 2012. That means most of the data point below 4% was in recent years, an environment where yields were FALLING.

What does the scatter plot look like if you expand the sample, say from 1913? Will the curve fit still hold?

thank you

kurt

The JPM plots correlation coefficients. It seems the chart says there is little to note correlation between stock returns and 10 yr treasury yields. At best, yields have a weak effect as described. Statistically the data is utterly undifferentiable from noise for the 4-8% yield range.

oldprof

John -- I actually did a lot of work on this some years ago. Some of my early blog posts exposed the errors by one of the top Street analysts, whom I did not name. Here are some links from my research, which pegs the inflection point a bit lower:

http://oldprof.typepad.com/a_dash_of_insight/2007/02/market_multiple.html


http://oldprof.typepad.com/a_dash_of_insight/2010/12/why-the-market-multiple-will-be-higher-in-2011.html

http://oldprof.typepad.com/a_dash_of_insight/2010/08/what-the-bond-rally-means-for-stocks.html

If you look at the chart for the ten-year, you will see that there was plenty of trading in this range during the early part of the last decade:

http://research.stlouisfed.org/fred2/graph/?id=DGS10,

Finally, I encourage you to consider the logic -- that low interest rates often reflect skepticism about earnings.

Some pundits just find reasons to throw out both data and reasoning that does not fit their story.

This is a curvilinear relationship. The data tell a clear story, perhaps better shown in my work than JP Morgan's. Would it surprise you that more people give credibility to their research than mine? That is why I cite it:)

Thanks for joining in, as you have done helpfully in the past.

Jeff


john

There is a problem with the JPM plot graph in regards to your argument. The data presented is from 1965 to 2013. 10y treasury rate did not go below 4% until 2008 during that time span. That means all the data points below 4% was during last few years. This period only saw falling rates AS A FUNCTION OF TIME(ie. yield change yoy was negative).

So the plot graph leaves out S&P return as rates rise OVER TIME (ie positive yoy rate change).

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