Current rising-rate concerns represent a temporary pothole for stocks

DEWITT, Mich. - Oct. 7, 2021 - PRLog -- We've seen similar episodes of rising rates, both earlier this year as well as during the last cycle when the Fed first announced its intentions to taper bond purchases. Each experience caused the stock-market rally to hiccup but didn't choke off the broader bull market.  Ten-year yields went from below 1% to 1.75% during the first three months of this year, a period that included pullbacks in the S&P 500 of 3.7% for four days and 4.2% for 12 days¹. However, during that entire three-month stretch in which rates were rising, the stock market rose more than 7%.  In this current spate, 10-year rates have jumped from 1.30% on September 15 to as high as 1.54% last week, reflecting a renewed concern over inflation pressures and reduced Fed-stimulus expectations. Stocks fell just under 3% between those dates¹. The period between May 2013 and May 2014 offers a potential parallel.  Rates jumped by 1.3% following the initial mention of a taper by the Fed. Yields receded temporarily, before making a second run higher (reaching 3% in both instances)¹. Neither proved to be the beginning of a prolonged period of rising rates.

• The bottom line: We don't expect market volatility to disappear quickly. The steadiness and magnitude of the rally throughout 2021 have prompted more headlines and reactions to this most recent dip than we think are necessarily warranted. That said, a more balanced landscape of headwinds and tailwinds at the moment raise the prospects of ongoing swings, and temporary weakness, in the market's path. Encouragingly, after coming under pressure for much of last week, a Friday rally left the market just 4% below all-time highs¹.

This shouldn't undermine the broader expansion. Economic expansions, and accompanying bull markets, do often end at the hands of high interest rates. We think this expansion could eventually endure a similar fate, but fortunately, rates are not restrictively high and, in our view, won't become so in the near future.  Existing inflation pressures pose the threat of accelerating the timeline, but we suspect it will be at least a year before the Fed hikes rates. Even then, it will take a tightening cycle before rates are likely to reach levels that make borrowing costs more restrictive for consumers and businesses, ultimately curbing economic growth, and ushering in a potential recession.

• The bottom line: Going back to the 1950s, Fed tightening cycles have included an average increase in the fed funds rate of more than 4%¹. We doubt the next rate-hike phase will get that far, but since WWII, there have been no recessions that began with 10-year rates even at 3%¹.

Source: 1. Bloomberg