Why Stocks Like Higher Rates

After the Federal Reserve hiked rates for the sixth time this cycle and left the door wide open for at least another two hikes this year and three to four more in 2019, higher rates are likely coming. The 10-year Treasury yield continues to consolidate beneath the 3% level, near four-year highs. What does it mean for equities if rates and yields do indeed go higher? Fortunately, to the surprise of many, stocks historically do very well when rates increase.

One of the bigger conundrums we have seen during this recent cycle of higher rates is how both stocks and rates can trend higher at the same time. As we illustrated in a recent Weekly Market Commentary, bond yields and stocks tend to trade together until the 10-year Treasury yield gets up around 5%. “Going back to the early 1960s shows that when the 10-year Treasury yield goes higher, stocks tend to follow along. In fact, out of 23 periods of rising rates, the S&P 500 Index gained 19 of those times. Things were even more pronounced recently. Since 1996, stocks gained all 11 times we saw higher rates,” according to Ryan Detrick, Senior Market Strategist.

Not to be outdone, the current period of higher rates began in September 2017 and the S&P 500 is up another 11% since then. History suggests higher rates may be a good thing and should the 10-year Treasury yield break about the critical 3% area, this could be further support for the bull market.

 

 

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