Interest rates are rising again, with the 10-year Treasury yield jumping from 3.6% to 4% in just a month. Although this increase may seem small, rising rates have far-reaching effects on markets, businesses, and consumers. It’s a shift no one can afford to ignore, especially when we look back at how similar situations played out in the past—most notably in the 1970s.
The big concern today is that these small rate hikes could signal the beginning of a larger trend. Even minor shifts in interest rates have the potential to snowball into significant market disruptions. Comparing current rate movements to those of the 1970s shows some striking similarities, which explains why rising rates often make investors nervous.
If the trend continues, the rate hikes we saw in 2022 could seem minor by comparison. Between 1972 and 1975, rising interest rates contributed to one of the largest market crashes in history. To understand the potential risk today, it’s important to look back to October 1973, when a major geopolitical event triggered a sustained rise in rates.
That event was the Yom Kippur War, when Egypt and Syria launched an attack on Israel, seeking to regain lost territories. The conflict led to an Arab oil embargo, drastically reducing global oil supplies. As oil was a key energy source for the global economy, prices tripled almost immediately, sparking inflation. When inflation rises, interest rates typically follow—and that’s exactly what happened in the late 1970s.
While there are echoes of 1973 in today’s rising interest rates, the situation isn’t exactly the same. For one, oil prices in October 2024 are actually lower than they were in October 2023, despite some recent increases due to current geopolitical tensions in the Middle East. However, if those conflicts escalate, oil prices could rise again, creating a risk of higher inflation and further interest rate hikes.
A close look at the 10-year interest rate and oil prices reveals a correlation—recent rises in yields have coincided with bumps in oil prices, driven by geopolitical factors. We’ve seen similar patterns over the past few years, with tensions causing brief oil price spikes, though most have resolved without lasting impact.
Today’s situation also differs from the oil price surge during Russia’s invasion of Ukraine. In early 2022, oil prices were already trending higher, with moving averages pointing upward. Now, oil prices are trending lower, and the technical indicators show a downward trend.
Despite some headlines drawing comparisons to the 1970s, today’s data paints a different picture. U.S. inflation has been falling sharply, not rising, and we are not in the kind of inflationary cycle that drove up interest rates in 2021. This is also very different from the prolonged inflation of the 1970s, which came in three waves and led to sustained interest rate hikes.
Since interest rates typically follow inflation trends, the expectation is that rates will likely decline, assuming there isn’t a significant escalation in Middle Eastern conflicts. If rates do trend lower, this would be a positive for the stock market, just as rising rates have been a headwind for equities.
Recent price movements in the S&P 500 reflect this potential. The index has broken out of a three-month consolidation phase, with all moving averages pointing upward, forming a well-defined rising price channel. These are strong indicators of a healthy uptrend, signaling a positive outlook for the market.
