Bill Miller says higher interest rates always led to a higher stock market the last two decades

Finance news

Higher interest rates are good for the stock market, noted investor Bill Miller said in call about the first quarter for markets.

“Looking at the last 20 years — all cases of higher interest rates have been met with a market that’s gone higher,” Miller said, according to notes from the call published May 15. He managed a fund at Legg Mason that beat the S&P 500 for 15 consecutive years through 2005 before he founded Miller Value Partners in 2016.

The opposite mentality has generally factored into daily market moves in recent years.

Stocks fell earlier this year as the 10-year Treasury yield climbed toward 3 percent. Even on Wednesday, stocks closed higher after minutes from the latest Fed meeting said the central bank would be comfortable letting inflation temporarily run above the 2 percent target, a statement that caused yields to decline.

But over the long term, Miller’s analysis appears to be holding true. The S&P 500 is up more than 30 percent since the Fed raised its benchmark interest rate in December 2015 for the first time in nearly a decade.

Miller pointed out that:

  • During the bull market of 1980, bond yields rose 210 basis points and the market was up 26 percent.
  • In 1983, bond yields rose 146 basis points and the market was up 17 percent.
  • In 1996, bond yields rose 85 basis points and the market gained 20 percent.
  • In 2009, bond yields rose 160 basis points and the market gained 23 percent.
  • In 2013, bond yields rose 126 basis points and the market rose 30 percent.

He said the connection between higher yields and stock prices has become more complicated since the financial crisis. “But overall, I think it looks like the market actually wants to go up.”

The S&P 500 is up more than 3 percent for the second quarter so far, and markets expect the Fed to raise rates at least two more times this year.

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