#99: Warning: Not for Rate Sensitive Viewers

Author

micksonmatch
July 11, 2024

It looks like the people have spoken; tomorrow I will write part 2 of the “tappers” body language. It is also going to be the #100 edition of these letters, so hopefully I can come up with something memorable and insightful.

S2N Spotlight

This might be a little technical for some of you, but the conclusion of my study is quite startling and something we can all understand. I was driving to the city at lunchtime, and I said to myself that it would be really nice if I did a regression study where I looked at short term interest rates on the first day of the year and the S&P 500 return for the year. The date range is from January 1961 to July 2024.

I wasn’t expecting to see a horizontal linear regression line showing that the S&P 500 is completely indifferent to interest rates. Intuitively, this doesn’t make sense, so I thought it would be better to use polynomial regression to provide a better fit of the data points. I don’t think it is important to go into the complexity of the difference between linear and polynomial regressions. Clearly, the data is much more complex than you realise, which requires a statistical approach that is more adaptive.

The bottom line is that the dependent variable “y” (S&P 500 annual return) has no relationship with the independent variable “x” (interest rates). I bet you didn’t see that coming.

I thought, well, maybe it will be better to look at the spread of the yield curve (10yr – 2yr) instead of the nominal interest rate. After all, everyone seems to believe that the yield spread is one of the most powerful indicators in finance. Nothing, nadda, zilch, ain’t no relationship. I have looked at variations where I use the mean of the interest rate or spread for the full year, not just the value at the start. It makes no difference.

Concluding remarks: It appears that neither nominal short-term interest rates nor yield spreads have any predictive qualities for forecasting the S&P 500’s 1-year returns. If you think I am missing something, please reply and let me know.

S2N Observations

Over the years, I have observed that when a negative story of a public figure doesn’t go away, the pressure usually mounts to a breaking point. I think we are hours, days at most, away from a Democratic Party announcement that President Biden is dropping out of the presidential election.

Yesterday, the S&P 500 made yet another new all-time high after its 7th up day in a row. I think a blowoff rally on the back of Biden pulling out will put a top into this current rally.

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