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posted on 20 December 2016

Will Rising Rates Kill The Stock Market Rally Or Hit Real Estate?

by Michael Haltman

With the Janet Yellen-led Fed raising the fed funds target range while signaling more hikes may be in the immediate future, will rising rates kill the stock market rally? Or slow down real estate?

Will an increase in borrowing costs bring the hammer down on homebuyers?

And, by the same token, will the rising mortgage rates that will accompany the Federal Reserve tightening policy bring the hammer down on the real estate market through an increase in borrowing costs?

If one were to consider the low base that interest rates are coming from after the post-financial crisis 8-year run of easy money (10-year Treasury approximately 2.62% after Fed move) and with 30-year mortgage rates still in the historically low 4.25-4.5% range, the thought after the initial psychological sticker shock for homebuyers and for mortgage refinancing would be no.

Add to the mix that the only reason for the Fed to be raising rates would be an economy that’s growing steadily and strongly along with inflation and that would seem to confirm the hypothesis above.

Correlation Between Rising Interest Rates And Stock Market Performance

From an article at MarketWatch, the chart below from Burt White at LPL Financial tells the historical story…

To summarize White’s findings,

historically, when the 10-year yield is below 5%, the correlation between stocks and bonds has been positive. Above 5%, the correlation turns negative.’

correlation between interest rates and stock prices

Correlation ranges between -1 and +1. Perfect positive correlation - a reading of +1 - implies that as one security moves up or down, the other security will move the same direction in lockstep. A perfect negative correlation of -1 means that if one security moves up or down the other will move the opposite direction by the same amount. A correlation of zero means there is no correlation and that movements by the two securities are completely random.

He goes on to say that

“while we would certainly not consider 5% a magic number, we do think yields have room to move before they become worrisome for the stock market."

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