Falling interest rates might actually be BAD for economy and stock market – this is why


Economists from the Swiss multinational investment bank have suggested there is a link between the days when interest rates are down and lower stock prices. Their theory suggests, according to the analysts, that investors are flocking to safety in bonds as trade war fears continue to send shivers through the economy and manufacturing data disappointed. Credit Suisse analysed data from between December 24, 2018, to last Friday. When looking at the moves on days when yields were falling, the analysts found the S&P 500 had lost eight percent.

But on days when yields were higher, the S&P 500 would be up by 30 percent.

Since the start of when the study was conducted, the S&P 500 has risen 20 percent, while the 10-year yield has lost around 42 basis points.

Patrick Palfrey, Credit Suisse equity strategist, said: “Interest rates are a barometer of what future expectations are.

“It’s a good gauge of what investors are focused on.

“If interest rates are falling, it’s likely the outlook is less bright.”

In the Credit Suisse study, the financial sector and technology stocks did the best when yields were rising.

Financials were up more than 42 percent on just the days yields were higher since Christmas Eve.

Mr Palfrey added: “It is something that we are watching.

“At the end of the day, we need an environment that is favourable for stocks.

“If we have things like trade as a concern or a slowing economic backdrop as a concern, those are likely to show up in declining interest rates.”

Yesterday saw 10-year yields driven about 10 basis points below the three-month rates, pushing the inversion to its deepest in almost 12 years.

The 10-year note yielded 2.269 percent while the three-month bill yielded 2.356 percent.

Meanwhile, the Dow Jones and broader US stock market finished sharply lower.

The Dow ended the trading day down 237.92 points, or 0.9 percent lower, at 25,347.77.

The S&P 500 declined 0.8 percent to 2,802.39, while 10 primary sectors reported declines, with consumer staples falling 1.7 percent.

QMA chief investment strategist Ed Keon told CNBC he had been ploughing more more into bonds.

“There’s some genuine reasons to be concerned about the economy, not to panic but be concerned.”


Please enter your comment!
Please enter your name here