MARK D. COOK - Opinion: Get ready for a 4,000-point Dow drop

The stock market has an empirical rule: interest rates lead stocks. And the current interest rate environment is pointing to a massive decline for the U.S. market.

Consider: The Federal Reserve has taken rates to the lowest level in more than a generation. This has energized stock prices. The Fed has persisted in its directive to “stay the course,” having made no raises in the discount rate for more than seven years. Such monetary policy has no precedent;

The most widely followed Treasury markets are the longer-term 10-year TMUBMUSD10Y, +1.83% and 30-year TMUBMUSD30Y, +0.93% markets. These two markets are highly sensitive to longer-term actual interest-rate pressures.

Are there parallels to this current market environment? Yes — 1987.

The summer that year began with a slow, methodical rise in actual rates. Yet the Fed did not raise the discount rate, even though actual rates suggested otherwise. The fall of 1987 arrived with the stock market having hit an all-time high in late August, unfazed by this unsettled condition.

As it happened, the Federal Reserve was literally forced to raise interest rates. Policymakers were behind the curve severely, just as the Fed is now. The 1987 rising-rate action caused stock prices to tumble more than 30% within two months, including a sharp 20% selloff in October — still among the Dow Jones Industrial Average’s DJIA, -0.01% worst one-day percentage declines ever.