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| Abraxas |
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| Moody's AAA Bond Yield |
| Interest rates are probably one of the most watched stock market indicators. The common wisdom is that low interest rates are good for businesses, and therefore good for stocks, while the opposite is true of high interest rates. However, it is the DIRECTION of interest rate change and NOT the absolute level of interest rates that is important. The chart on the left shows that although large 6-month changes in AAA corporate bond yields lead to poor returns for stocks over the following year... |
| ... the notion that low interest rates set the stage for bull markets while high interest rates lead to bear markets is false. When looking at the absolute level of interest rates the truth is the market typically performs much better over the course of a year in which interest rates are high, not low. In fact, all of the lowest 1-year stock market returns came when rates were very low, around 5% on high-grade corporate bonds. The best stock market returns were posted when interest rates were over 10%, when interest rates were considered HIGH!! In fact, the market has NEVER posted a 1-year loss when yields on AAA corporate bonds where in excess of 10%! |
| The following charts demonstrate that the conventional wisdom on interest rates is dead wrong. When it comes to making decisions about when to invest in stocks, the facts do not necessarily agree with what most investors believe. It pays to do your homework. |
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