As investors continue to speculate the course of action that the Federal Reserve will take when it releases its latest statement at 12:30, we wanted to highlight a chart which compares the S&P 500 to long-term interest rates over the last few years. While the majority of investors are hoping that the Fed announces a policy to push long-term interest rates even lower, we would note that lower rates have not not necessarily always been the best thing for the bulls. Although it appears at first glance that lower rates equal higher stock prices, if you look more closely, you can see that virtually all of the gains have come when the yield on the 10-year was rising, while each leg lower in interest rates (shaded areas) has also seen a leg lower in stock prices.
As we noted in early June when we first published this chart, there are a lot of factors at play in this relationship, so it is not so black and white, but in an environment where investors flee to Treasuries at the slightest whiff of weakness, maybe what the market needs is some confidence so that investors feel comfortable moving out of Treasuries.
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