Interest Rates Video

Are Rising Rates Good or Bad for Stocks?

Transcript

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.

Key Insights

  • 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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Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of April 2021 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual future outcomes may differ materially from any forward-looking statements made.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc.

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