This chart shows the relationship between interest rates and stock prices. Higher interest rates have lagging impact on the real economy and it takes a time for this impact to be felt in the economy.
2-year backward looking US 10Y yield differential (change): For Example, the 10Y yield on 8/31/2008 is 3.83%, looking back for 2 years, 10Y yield on 8/31/2006 is 4.74%, the differential or the change is 0.91%
2-year forward looking S&P500 price change in percent: For example, S&P500 on 8/31/2008 is 1282.83, looking forward for 2 years, SPX on 8/31/2010 is 1040.88, the change in percent is -22.3%
Key Takeaways:
The 10Y interest rates are a reasonable predictor of where the stock market is headed for the coming 2 years. Positive secondary axis implies bond price rally or lower bond yield relative to 2 years ago. Positive primary axis implies higher stock price 2 years ahead in the future.
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