How Well Do Long-Term Bond Interest
Rates Predict Stock Market Returns?

Abstract

We observe that over the last 50 years, long-term interest rates in the U.S. have had a remarkable record of predicting stock-market returns, specifically in the 16- to 17-year range. We quantify this phenomenon and test via standard models and Monte Carlo simulations whether such a phenomenon is likely to arise by chance. We show that the probability for that is small, but not negligible.