good piece from Bob Bronson
In spite of the Fed predictably (see our previously posted
Market Commentary) doubling their usual rate cut and
going to a neutral stance in a valiant effort to try and
convince the marketplace that this is the end of such
stimulus, as is reflected in the following FT article:
news.ft.com
ryFT&cid=1035873161850&p=1012571727304
I am presenting other dimensions of interest rates
with respect to their timing of stock market trends.
Everybody knows that, generally, low interest rates are
bullish and high interest rates are bearish for both
the stock market and the economy. For example, when
the discount rate, one of the administered short term
interest determined by the FOMC, broke above 6% in
early 2000, the cap-weighted measure of US equities
peaked and started its BAAC Supercycle bear market
period. This was similar to the previous two BAAC
Supercycle bear market periods when the discount rate
rose to 6.0% in 1969 and 1929. And the same happened
to the Japanese stock market in 1990 when their central
bank discount rate rose to 6.0%.
History shows, it's not so uniform at stock market lows,
but bottoms are always accompanied by the lowest short
term interest rates at the time, as newly rising short
term interest rates reflect incipient economic recovery.
However, the more important trend in interest rates
does not have the same intuitive or simple effect on
stock market trends that the absolute level of interest
rates does.
Although declining long term interest rates, like
Treasury bond yields, are usually bullish for the
stock market (and economy), as they have been since
they peaked in 1980-1 along with the inflation rate
in goods and services as measured by the CPI, they
aren't as bullish as short term Treasury rates are
bearish when the latter are declining faster than
former, or when their difference (or ratio) - the
yield (maturity or duration) curve - is rising.
For example, while 10-year Treasury bond yields have
declined more than 250 bps, or about 40%, since their
peaks in early 2000, short term Treasury rates have
declined twice as much, or more than 500 bps (~80%)
since their peaks in late 2000, reflecting a rising
and bearish yield curve since then.
In other words, declining economic activity, as is
reflected by faster declining short term interest
rates, is more bearish than slower declining price
inflation, as reflected by longer term interest
rates, or bond yields.
In addition to this yield curve metric, historical
quantitative analysis shows that real, or inflation-
adjusted, interest rates are also very important in
timing stock market trends, especially when these
two indicators confirm each other.
For example, real interest rates have declined, right
along with the stock market, since their very clear
and broad peaks from early-1998 to late-2000.
History and economic logic also show that when interest
rates, especially short term ones like Fed Funds, 90-day
T-Bills and commercial paper, start increasing relative
to the rate of inflation, as measured by the CPI, for
example, bear stock markets end and bull markets start.
For example, this happened following the 1987 Crash and
1990 bear stock market and recession. Of course, this
bullish bottoming in real interest rates can happen by
either short term rates rising, or the inflation rate
falling, or some combination of both.
Thus, the recent sharp drop in short term interest
rates is bearish for the stock market according
to these two currently confirming and proven stock
market timing indicators. Their bearishness is also
consistent with the negative balance of our other
quantitative, fundamental and technical stock timing
indicators in our eight-factor forecasting model - at
least for the next few months, or until either short
term interest rates turn up, or the more likely sooner
events that both long term interest rates (bond yields)
and inflation rates declining significantly. Watch
for sharply declining commodity prices to lead the
decline in various broad measures of inflation.
Because both the yield curve and real interest rates
have just become more bearish for the stock market,
contrary to currently popular net bullish opinions
about them and other trend-following factors resulting
from the recent four-week, news-induced, primarily
short-squeeze rally, as I have recently warned, we
continue to expect global stock markets will resume
their aggregate decline to six-plus-year new lows -
starting with the Nikkei, which is back to 19-year
lows this morning.
Furthermore, these news lows should develop into
the both the necessary and sufficient condition of
a capitulating selling climax ending both the now
32-month bear market in the cap-weighted index
of all exchange-traded US common stocks, and the
more than 54-month bear market in the unweighted,
or equally-weighted, index of the same as is
illustrated in the attached .gif file chart.
Bob Bronson
Bronson Capital Markets Research |
