The following contains excerpts from today's MSN Money article by Mark Cook.
The summer of 1978 began with a slow but steady rise in real interest rates. However, the Federal Reserve had not raised the discount rate and the stock market was at an all time high by late August. Given how frothy the markets were, the Fed was left with little option but to raise rates...the feeling being they were behind the rate curve and had to catch up. Such is the present situation.
When the Fed finally raise rates in the fall of 1987, stock prices fell more than 30% in two months including a 20% sell-off in October alone...one of the market's worst days ever.
These warning signs are again visible. The first week of June recorded the highest interest rates since December. Bond prices are down about 12% since the end of January. Stocks conservatively trade about 2X that of the bond market so at current market levels and if history is to be our guide, the 12% slide slide would equate to a loss of about 500 points on the S&P 500 and a Dow pullback of close to 4,300 points. Except it hasn't happened yet.
The moral? Actual rates deserve our attention. The actual bond market is already into a bear market, with declining tops and lower lows since the end of January, putting the equity market at risk. Further, the first week of June saw interest rates spike, with bond prices losing 2.5% of their value. equating to around a 7 1/2% loss in stock prices in one week.
The pressures are increasing exponentially since the decline in bond prices has not resulted in a stock market slide. And the greater the pressure, the faster and more dramatic the stock market decline. Hold on tight.
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