Interest rates are a strong indication of future growth and inflation, which would lead us to believe that if our expectations of future growth and inflation increase then interest rates should move higher. Under this same scenario of higher growth expectations, we would expect equity markets to rise as they have during the last 12 months.
If we cherry pick a date in the past, July 9, 2009:
- S&P 500 was trading at 882.68
- 10 Year Treasury Yield at 3.405%
As of March 18, 2010:
- S&P 500 has rallied 32.08%
- 10 Year Treasury yield has increased by 27.3bps to 3.678%
It seems that interest rates and equities are following different paths.
It seems that deflationary pressure is still heavily weighing on interest rates while equity markets might be getting ahead of themselves. I would feel much better investing in equities if I felt there was upward pressure on interest rates. Which story are we to believe?