The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends, Revised and Updated Edition

Chart 9

Mr. and Mrs. Financial—Real Split Personalities

Some folks think rising long-term interest rates won't hurt stocks because they think that corporate earnings will rise even faster. As this chart shows, stocks do at times bulge through a wall of rising interest rates, but it's a rare day in paradise. This chart not only gives you an 80-year perspective on the timing of movements of the stock market, as measured by railroad stocks (the upper chart), but it also compares those movements to interest rates.

Seeing the interest rates is a tad tough because they're shown on an inverted basis—as the price of railroad bonds (the lower chart). As interest rates rise, bond prices fall. When rates fall, bond prices rise. It's a mechanical, arithmetic function (study Chart 33). So, on the chart's vertical axis you see two scales. The inner one is for stock prices, and the outer one is for inverted interest rates. So, for example, the chart shows you that in 1899 and 1935, yields hit long-term lows at 3 percent.

Why look at railroad stocks versus railroad bonds? The first reason is to compare securities of the same entities—apples to apples, not oranges. Second, during most of this chart's duration, railroad securities were the blue chips of the day. These were the securities folks were most interested in then. Third, you can see that while rising interest rates (falling bond prices) don't always ensure a stock market decline, they seem to be a real drag on stock prices. There have been ...