A common piece of advice on this subreddit at the moment is to not fight the Fed.
The notion is that an environment with high interest rates will lead to an economic slowdown, consequently leading to earnings declines and stock market pullbacks. In theory, this makes sense, but does the data actually support this?
I did a rudimentary analysis of the last 70 years of interest rate and annual S&P 500 returns. Here is the first graph: https://imgur.com/a/wsTQtAj. Looking at this graph, you don’t see an obvious correlation between the two. Of course, you need a more rigorous analysis to come to this conclusion, so I made a scatter plot of annual S&P returns vs interest rates and asked Excel to fit them linearly. Excel shows a very weak negative correlation (note the extremely low R square value of 0.063. https://imgur.com/a/Vl4OJAc
Finally, I made a chart showing annual S&P returns vs interest rate brackets (0 to 2%, 2 to 4% etc). https://imgur.com/a/6k309lc This graph doesn’t show any correlation between the two factors either. The only thing to note here is that S&P returns have been unusually low for interest rates between 2 and 4%.
This is a very basic analysis, and the data viz isn’t great, but just wanted something to get the discussion going. Would love to hear your thoughts and feedback.
