The Stock Market Affects Interest Rates?

Rates have been inching up with the strength in the stock market. A strong stock market means people pull money out of the bond market which creates a weaker bond market, and a weaker bond market means bond yields have to go up to keep demand up in the bond market.

So interest rates have been under pressure thanks to the continued strength in the stock market, which causes people to flee the bond market and take on risk in the stock market. But we have to put this into perspective, rates have only been lower two other times in 220 years (and not by much), once in the 1940s and then again in the 1950’s, that is it. So right now we have lower rates than in the Great Depression, we have lower rates than all of the 1800’s, and we have lower rates than in the 1790’s, which is when they first started to record interest rates.

I would say we have pretty stellar interest rates no matter where they land, even if they go up a half percent or one percent from here. The median interest rate level in the country over time is in the mid 6’s, so 4.5% or 5% are just fine.

There are of course other variables that affect the bond market and interest rates, the stock market is just one of many. Interest rates are affected by inflation, Federal Reserve policy, currency, economic growth, etc. And, there is no direct correlation between stocks and bonds, you could see the stock market crash, and rates stay flat, rates don’t have to fall if stocks do.

The bottom line is that rates are great at their current level, and even if they go up some more from here.