As we have long advocated, the declining trend in interest rates is coming to an end and the secular trend in rates is up. To provide a decent level of analysis on what might happen going forward, we have a comparison of the Dow Jones Industrial Average to the 3-month Treasury from 1934 to the peak in May 1981.
Conventional wisdom says that as interest rates rise then stocks should underperform. However, when contrasted to the interest rate sensitive Dow Jones Utility Average, we see that the index increased +1,321% from the April 1942 low to the March 1965 peak.
We contrast the change in the Dow Jones Utility Average to the 3-month Treasury to highlight what happened to the price of Silver in the same secular trend.
Historically, it is understood that rising interest rates mean rising commodity prices. In the last secular trend, the price of silver increased modestly until, in the late stage of the cycle, all commodity prices go wild. We believe that such a trend is likely to occur again.
Our general conclusion on the secular trend in rising interest rates is that the best alternative in the initial stages is stocks and commodities in late stage of the same trend.
“For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period ( source: Dow, Charles H. Review and Outlook. Wall Street Journal.February 21, 1901.)”
