This might be the most important chart of them all:
Observations:
- In the 1890s, you can see that as interest rates dipped, stock valuations spiked. But then between 1900-1920, when interest rates were rising, stock valuations plunged.
- The Roaring ’20s coincided with falling interest rates. A miniscule uptick in interest rates in 1929 coincided with the collapse.
- A rate cutting cycle in 1932-33 led to a rebound rally in the stock market, but even falling interest rates could not keep the market rally going, as a major stock crash began in 1937.
- In the 1940s, we saw low stock valuations and low interest rates.
- From 1950 until the late 1960s, stocks and interest rates were rising together. However, a sharp rate hike led to a sharp stock decline.
- Starting in the 1970s, interest rates began climbing rapidly and stock valuations went in the opposite direction.
- When interest rates hit their peak in 1981, stock valuations hit a 50-year low.
- Interest rates started falling in 1982, which marked the beginning of a massive run in the stock market that peaked in 2000 at the highest valuations ever. However, a rate hiking cycle in the late 1990s would eventually burst the stock bubble.
- Rates were falling in the early 2000s even as valuations were coming down, but not long after stocks began to climb, an interest rate rising cycle led to yet another major stock downturn in 2008.
- In response, interest rates dropped to near-record lows, and then fell even lower. The stock market took off and never looked back as a result.
Other than the 1940s-1960s, we can see a very clear inverse relationship between the 10 year yield and stock valuations.