"Act so as to keep the mind clear, its judgment trustworthy" - Dickson G. Watts, author of Speculation As A Fine Art And Thoughts On Life. [A brief summary here (link)]

Sunday, May 23, 2010

real interest rates (part 2)





To follow-up on the post last week, I subscribed to and downloaded some data from http://www.economagic.com/, which I think is a great source of data at a very reasonable price.

In looking at corporate bond rates (Moody's Baa index) and the S&P 500 since 1950, I think the reason for observing a positive relationship between changes in real interest rates and changes in the S&P 500 is mainly due to the underlying inverse relationship between real interest rates and inflation (which is inverse by definition because Real Baa Interest Rates = Baa Interest Rates - Inflation). In other words, decreasing inflation is associated with increasing real interest rates by definition. However, decreasing inflation tends to be associated with a rising S&P 500 as well.

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