Why A Jump In Interest Rates Could Lead To A Generational Rally In Stocks

The story of the week, as we just noted, was in the Treasury market, where finally yields started to shoot up a bit.

They’re still incredibly low by all standards… even just compared to the last year.

And though higher yields may be seen by some as a threat to other parts of the economy and markets, history says the opposite. In fact, a sustained move higher may be just what the doctor ordered in order to give equities more legs.

This chart from Bank of America looks at the stock market vs. yields on long-dated bonds going back over a century.

bonds stocks

Photo: Bank of America

What it finds is that 3 times in the past, a period of sideways stock market action (denoted by the dashed boxes) finally ended when the Treasury market made a turn. In the early 20s, 50s, and 80s, it was a major reversal in yields that caused the market to jut higher. The market’s currently in another box, still below its highs of 2007, which of course were right around the highs made in 2000.

Looking for us to break out of the box? Then look for a major turn in  yields.

As BofA puts it:

If Bernanke, Draghi, King & Shirakawa win their current “War against Deflation,” a “good” bear market
in bonds (rather than a “Greek” bear market in bonds) should coincide with a major break to the upside in equity markets. 

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