Broker Check

Interest Rates And Stocks

| December 21, 2021
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The accommodative stance of the Federal Reserve over the past decade has been one of historic proportions. Such monetary policy efforts aided the economy in the years following the Great Financial Crisis and managed to buoy stocks higher. Broad sentiment was also positively impacted, as were the gains in the labor market. An argument could be made that interest rates have remained low for too long and that their impact on capital markets may  have generated an addiction to a debt-fueled corporate America incapable of kicking the habit. Perhaps that’s true, yet it’s important to note that the health of corporate balance sheets, as well as the fiscal health of consumers, is better today than almost any other period over the past five decades. Right or wrong, easy monetary policy provided a backdrop that may have arguably increased the pace of economic improvement to a level that may have been largely unattainable without it being in place. Easy access to capital, however, cannot remain the norm on a perpetual basis, and we’re now starting to see what the path to a more normal monetary policy cycle may look like. Such recent discussions have been centered on the notion of higher transitory inflation factors as the reason for action, in addition to the simple observable fact that there is no meaningful and objective reason to maintain an ultra‐accommodative monetary policy backdrop. Economic growth remains robust and capital markets have thrived.

As interest rates appropriately rise, and as monetary policy appropriately tightens, conventional wisdom suggests that risk assets (such as stocks) may be adversely impacted. We want to urge caution in such a mindset because there’s a lack of historical precedence to support it. What has often occurred is that stocks tend to react adversely at the onset announcement of a potential monetary policy adjustment, at which point they quickly reverse such action, and often find themselves in positive territory during the actual period of rising interest rates. The data below utilizes the 10‐year U.S. yield as a proxy for rising interest rates and tracks the performance of the S&P 500 amidst the most drastic upward yield swings of the past 30 years. The data outlines the conclusion that equity market participation tends to be an appropriate solution within a rising interest rate environment. It is our view that bonds may carry a greater absolute risk than stocks over the next three years, despite the added short‐term volatility of equity market participation.

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