Many observers and investors worry that stocks are going to be hit when the Fed starts to raise interest rates, especially if they move too soon to tighten. I've maintained for a long time, in contrast, that an early tightening of monetary policy would be good for stocks. This chart shows that investors' fears are not necessarily well-founded.
The ECB last week surprised the world by moving sooner than expected to lift its short-term interest rate target. I wrote last week that this was a good thing, and noted that pre-emptive monetary policy tightenings have been very good for the euro, the Aussie dollar, and the Canadian dollar.
The chart below (click to enlarge) extends that observation to the stock market. German 2-year yields, which are the market's best guess for what the ECB's target rate will average over the next 2 years, have soared from a low of just under 50 bps in June, 2010, to now almost 190 bps. This move was driven by the ECB's sooner-than-expected tightening of monetary policy, and the rise in rates closely parallels the new-found strength of the European stock market.
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