The good news about the Dow Jones Industrial Average is that it has been around for the last two secular periods of rising interest rates. The first period is from 1898 to 1925 (27 years) and the second period is from 1942 to 1981 (26 years). In this posting, we show how the crowd that claims rate increases are the death of stocks is false.
The False Narrative
The false narrative is as follows, “…the reason for the wealth creation in the U.S. since 2009 is due to the decline in interest rates. Therefore, when interest rates start to increase there will be a crash in stock prices.”
The Facts
Let us review the performance of the Dow Jones Industrial Average from 1896 to 1925 within a secular trend of rising interest rates.
Let us review the performance of the Dow Jones Industrial Average from 1942 to 1981, within the last secular trend of rising interest rates.
In both instances, within the entire period of rising interest rates/inflation, the Dow Jones Industrial Average increased significantly. Most interesting is the fact that the period from 1896 to 1925 had stocks offering substantial total returns due to lopsided par value stock and high dividend yields. This puts much of the gains not calculated in the Dow Jones Industrial Average in the pockets of investors and not the price of the index.
The False Narrative Crowd
It is very easy to make false claims. However, the data tells a completely different story. There will be stock market crashes in either secular trend in interest rates for various other reasons. Strictly because rates are rising isn’t necessarily one of them.