Rising rates don't have to doom stocks

Rising rates can be scary, especially for a stock market addicted to unbelievably low rates.The wild swings on...

Posted: Feb 20, 2018 6:17 PM
Updated: Feb 20, 2018 6:17 PM

Rising rates can be scary, especially for a stock market addicted to unbelievably low rates.

The wild swings on Wall Street this month have been largely driven by fears about whether the rapid spike in Treasury rates will continue. Stocks slumped again on Tuesday as bond rates ticked higher.

While rising rates typically slow the market down, history shows that this backdrop doesn't have to completely doom the stock market. In fact, stocks have marched higher in the past despite headwinds from the bond market.

Since 1971, the S&P 500 has advanced in eight of the past nine rising rate periods, according to S&P Dow Jones Indices. Total returns, including dividends, have averaged 20%, during these times. The index climbed nearly 40% twice and its worst year was a loss of 4%.

"If there is accelerating growth and inflation, like now, rising interest rates can result in appreciating assets," Jodie Gunzberg, head of U.S. equities at S&P Dow Jones Indices, wrote in a recent report.

This thinking may help explain the impressive rebound on Wall Street since February 8. The S&P 500 spiked 4.3% last week, its best in five years. The comeback allowed the S&P 500 to quickly recover $1.3 trillion of the $2.5 trillion that was lost during the market turmoil.

Investors have chosen to view rising rates as evidence of an accelerating economy, not something to fear. And the market moves aren't dramatic enough to upend corporate profits and stock prices that have been zooming higher. Both should benefit from the Republican tax cuts as well as a splurge in government spending.

Related: Sunny days for the economy can't last forever

BlackRock upgraded its view on U.S. stocks to overweight on Tuesday, citing fiscal stimulus that is "supercharging" expectations for earnings growth.

"Economic strength was already changing the tone of earnings momentum, but U.S. tax cuts and government spending plans lit a fire under the trend," Richard Turnill, BlackRock's global chief investment strategist, wrote in a report.

Wall Street will continue to pay close attention to the bond market.

Treasury yields have climbed sharply -- the 10-year note has gone from 2.4% at the start of the year to 2.9% now -- for a variety of factors. The reaction is partially because of stronger growth as well as signs of inflation and increased U.S. government borrowing to pay for the tax law and other spending. The Treasury Department is auctioning off $258 billion of debt this week alone, providing a key test for President Trump's spending spree.

U.S. Treasury rates play a pivotal role in setting prices for all other financial assets, from mortgages to stocks. That's because U.S. government debt is considered the safest investment in the world. Once investors know the return on "risk-free" Treasuries, they can determine the value of riskier assets like stocks.

Low rates often boost returns for stocks -- as they have over the past 10 years. When rates rise, the trend reverses, and the bond market steals some thunder from stocks.

Analysts have said that if rates don't rise too quickly, stocks can continue to climb, albeit at a slower pace than the boom in late 2017 and early 2018. BlackRock argued in its bullish call that rates will probably rise only "gradually" due to "modestly higher" inflation. The firm predicted that this economic cycle still has "room to run."

Related: First-year presidential economies

However, a sharp spike well above 3% on the 10-year Treasury could cause more trouble for stocks because it could drive cash into safer bonds.

Such a move could be sparked by fears that stronger-than-expected inflation will force the Federal Reserve to cool off the economy. The Fed has signaled it plans to only raise rates three times in 2018, but the central bank said last month it's "monitoring inflation developments closely."

"Eventually, the perception will be that the Fed is falling behind the curve, because inflation and economic pressures will continue to mount," Scott Minerd, global chief investment officer at Guggenheim Partners, wrote in a report on Tuesday.

"That will be the straw that breaks the camel's back," he wrote.

Wall Street will also pay close attention to the economy's trajectory. If growth slows, investors could suddenly fear "stagflation" -- a nasty mix of slow growth and high inflation (see the 1970s). Former Fed chair Alan Greenspan recently predicted "we're working our way towards stagflation."

"It's when growth softens while inflation is still rising that returns suffer most," Andrew Sheets, head of cross asset strategy at Morgan Stanley, wrote in a recent report.

Mississippi Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 15229

Reported Deaths: 723
CountyConfirmedDeaths
Hinds99925
Lauderdale73561
Madison72023
Scott65012
Neshoba63038
Jones59825
Forrest55338
DeSoto5337
Rankin4217
Leake42112
Holmes39728
Copiah3104
Jackson30513
Attala29216
Yazoo2734
Newton2714
Leflore25831
Harrison2577
Lincoln25628
Monroe25525
Lamar2355
Oktibbeha23512
Lowndes2119
Pearl River20931
Pike20211
Adams19615
Noxubee1856
Wayne1771
Warren1719
Washington1687
Covington1652
Bolivar16011
Jasper1574
Smith15011
Lee1496
Kemper14411
Clarke14318
Chickasaw13312
Lafayette1314
Coahoma1214
Carroll11711
Marion1159
Clay1124
Winston1121
Claiborne1112
Lawrence1021
Simpson1010
Yalobusha905
Hancock9011
Tate891
Grenada893
Wilkinson889
Itawamba877
Union835
Marshall833
Montgomery831
Sunflower813
Jefferson Davis772
Tippah7311
Panola703
Webster691
Calhoun644
Humphreys607
Amite601
Walthall550
Tunica543
Prentiss523
Perry503
Choctaw432
Jefferson421
Tishomingo320
Pontotoc323
Stone300
Franklin282
Tallahatchie271
Quitman260
George251
Alcorn171
Benton150
Greene121
Sharkey70
Unassigned00

Alabama Coronavirus Cases

Confirmed Cases: 17359

Reported Deaths: 618
CountyConfirmedDeaths
Mobile2191115
Jefferson1780102
Montgomery163238
Tuscaloosa73814
Marshall6879
Franklin5457
Lee54033
Shelby50319
Tallapoosa42364
Butler40217
Chambers35325
Walker3442
Elmore3398
Madison3274
Baldwin2839
Dallas2603
Morgan2511
Etowah24811
DeKalb2433
Lowndes23812
Coffee2291
Sumter2206
Autauga2164
Houston2094
Bullock2034
Pike1980
Colbert1782
Russell1670
Marengo1636
Lauderdale1612
Hale1598
Calhoun1543
Choctaw1518
Barbour1501
Wilcox1447
Clarke1422
Cullman1260
Randolph1257
Marion12111
St. Clair1181
Pickens1114
Dale1100
Talladega1093
Chilton1001
Limestone940
Greene944
Winston880
Covington771
Jackson772
Crenshaw763
Macon754
Henry742
Bibb721
Washington686
Blount611
Escambia573
Lawrence480
Geneva400
Conecuh391
Coosa381
Monroe372
Perry370
Cherokee373
Clay272
Lamar230
Fayette150
Cleburne141
Unassigned00
Tupelo
Clear
61° wxIcon
Hi: 84° Lo: 58°
Feels Like: 61°
Columbus
Clear
60° wxIcon
Hi: 86° Lo: 59°
Feels Like: 60°
Oxford
Clear
55° wxIcon
Hi: 83° Lo: 57°
Feels Like: 55°
Starkville
Clear
55° wxIcon
Hi: 84° Lo: 56°
Feels Like: 55°
WTVA Radar
WTVA Temperatures
WTVA Severe Weather