LPL Research recently penned an interesting post entitled “Why Stocks Like Higher Rates.”
“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. Since 1996, stocks gained all 11 times we saw higher rates,”
Here is the conclusion:
“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.”
The analysis is actually backwards.
Michael Lebowitz just wrote about this in Fasten Your Seat Belt, Turbulence Ahead. His article is worth reviewing to see what has really happened over entire rate cycles and not hand chosen dates to prove a point.
While the markets, due to momentum, may choose to ignore the effect of “monetary tightening” in the short-term, what about the longer-term? For example, one might think based on the LPL table above that the financial crisis of 2008 was positive for stock investors. The analysis shows that in 8 of the 15 months spanning from March 2008 to June 2009, equity holders had gains. While that is true, equity holders that did not get the memo with specific dates on when to buy and sell lost over 50%.
As shown in the table below, the bulk of losses in markets are tied to economic recessions.
However, while it is true the historical average interest rate where a recession was triggered was near 5%, averages are very deceptive.
Of more importance than the nominal level, are the actions of the Federal Reserve which are typically reflected by the 10-year Treasury rate. The graph below shows the confluence of Fed Fund increases and recessions. The table below the graph shows the date of the first Fed rate hike, the number of months until the next event which was either a recession, a market correction or both, and the percentage decline in the stock market.
