The equity-bond relationship

Another interesting analysis shared by André Huwiler, based on 155 years of Robert Shiller’s US market data, suggests that equities have historically delivered lower returns during periods of rising bond yields than during periods of declining yields.

At first glance, this makes sense. Lower rates mean cheaper financing for companies and lower discount rates for future earnings, supporting equity valuations.

However, dividing 155 years of financial history into just five interest rate regimes may be a little simplistic. A lot happened under the hood: wars, depressions, inflationary shocks, technological revolutions and very different monetary policies.

It would therefore be rather courageous to conclude from this relationship alone that equities will deliver lower returns going forward.

Nevertheless, the direction may well be right. Higher interest rates make valuations matter more, particularly when expectations are already high.

And that is certainly not bad news for disciplined value investors.