Stock Market vs. Bond Rate Relationship Revealed

The stock market is affected by many things like the Fed and the economy. However, there is not enough talk about how the movement of bond rates makes stocks more...

Stock Market vs. Bond Rate Relationship Revealed

Stock market movements are affected by a number of factors, including the Fed and economy. There isn't enough discussion about the impact of changing bond rates on stock prices. The S&P 500 is suffering a bad September because bond rates are exploding higher. Find out more about the dynamic relationship between bond rates and stock prices.

Investors have known for a long time that stocks tend to fall when interest rates rise.

This was the primary catalyst for the bear market of 2022. Investors were encouraged by 2023, when they realized that the inflation rate was being brought under control. Rates would be lower in future. Stocks rose for most of the year.

On 9/20, the Fed responded "NOT SO FASTER!" This caused rates to spike again...and investors to flee stocks.

Has the story changed for the better since Thursday?

This week's comment will review the past.

This 1 month chart shows the rise in the 10-Year Treasury rate compared to the decline of S&P 500(SPY).

It is easy to see the inverse relationship. As rates increased later in the month...the stock drop accelerated.

My commentary on the 9/20 Fed announcement explained the reasons for the higher rates in detail. This is the main section of our discussion today.

"...Brief summary of the Fed's Wednesday announcement

The economy is performing better than bringing inflation down to the target level will take a little longer...the good thing is that we believe we can achieve it without creating recession.

Why did the stock market fall despite this positive outlook?

The Fed's dot plot for rate expectations has now a rate of 5.1% at the end of the year 2024. This was a revision higher than the previous estimate of 4,6%.

This is certainly in line with the Fed's narrative that "higher interest rates will continue for longer", however, it has been much higher and longer than investors had anticipated.

Let's focus on what happened on Thursday with the 10-year Treasury rate:

This chart of one day shows the rates continuing to rise early on Thursday, up towards a peak of 4,688%. The session ended with a dramatic drop to 4.577%. This helped the stock market enjoy its best session in some time. (The bond selling continued into Friday, which increases the likelihood that we've seen peak rates).

Remember that just a few months ago, rates were around 3.8% lower. This dramatic move may finally have run its course. If this is the case, it increases the chances that we've reached a bottom and stocks will continue to rise.

What I find most surprising about the recent rise of bond rates is that the probability of a Fed rate hike on November 1st has fallen from 62% a month earlier to only 19% today. The idea that a rate hike will happen by the December 13th meeting is down to 36%.

This information does not match the Fed's statements from September, which appeared to indicate a strong likelihood of another hike. This information does not match up with the soaring bond rate. Another clue is that bond rates are overextended, and about to fall. This is good news for stocks.

When you look at the bigger picture, it's very difficult to have a market that is in a downturn without a recession. Right now, the chances of this happening are low.

This is why I think that the current sell-off is reaching a bottom. Perhaps not further than the 200-day moving average, which is closing in on 4200. This is the worst-case scenario.

The upside potential for this year is to retest the 4,600 highs seen at the end of July. Next year, we'll likely break above 5,000.

To this end, I would recommend that you stay fully invested on the market. The key to success lies in selecting the best investments. Next, we'll discuss how to make the best investments.

What Next?

Find out my brand-new "2024 Stock Market Outlook", covering:

There's More!

Reitmeister Total return Editor and CEO of

SPY shares traded at $430.78 on Friday morning. This was an increase of $2.26 (+0.53%). SPY shares have gained 13.89% year-to-date compared to a % increase in the benchmark S&P 500 Index during the same time period.

Steve Reitmeister

Steve is known as "Reity" to StockNews' audience. He is not only the CEO, but also shares 40 years of experience with the Reitmeister Portfolio. Reity's biography is available, as are links to some of his recent articles and stock selections.