If you look at research on things like coffee, egg yolks, red wine, it is actually not clear whether these things are good or bad for you. That’s a good analogy for markets in 2021.
Perhaps the number one question investors need to ask themselves in 2021 will be:
“Are rising rates good or bad for stocks?” It is not that obvious.
A basic valuation model will tell you that when the discount rate goes up, the valuations go down. Also, when the expected return on bonds goes up with rising rates, then that makes bonds more attractive than stocks.
However, the reality is that the Fed tends to raise rates only when they expect positive growth, and positive growth surprises drive superior stock returns.
In fact, our research shows that if you go back 30 years, and look at all rolling 12-month periods, and isolate the 72 rolling 12-month periods during which the U.S. 10-year yield was up by 50 basis points or more, you get a remarkable average S&P return of 17%, and the hit rate—the percentage of times stocks returned a positive outcome—is 100%.
So it’s not that obvious that rising rates will hurt stocks if we continue in this strong economic recovery.
- Although rising interest rates are typically a headwind for stocks, the reality is not that obvious.
- Rising rates may make bonds relatively attractive (given higher expected returns), but the anticipated growth needed to raise rates could boost stock returns.
- Our review of rising-rate environments over the past 30 years shows that, in a strong recovery, rising rates may not necessarily be detrimental to stocks.
Past performance is not a reliable indicator of future performance.
A basis point is 0.01 percentage point.
Source for our research: Bloomberg. Using monthly data as of January 1990 to February 2021 from the U.S. 10 Year Treasury Index and S&P 500 Index.
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