Over the past year, rising bond yields have been a major driver of stock sell-offs.
But the market has shifted to the view that interest rates may remain higher than they have been in the past decade for longer than originally expected, said Brian Belsky, chief investment strategist at BMO. He points out that rising interest rates are not necessarily a bad environment for stock prices.
In an analysis going back to 1990, Belsky found that when the 10-year Treasury yield (^TNX) was high, the S&P 500's monthly returns actually produced the highest average annual returns.
According to Belsky's research, the benchmark average annual return was 7.7% in months when the 10-year Treasury yield was less than 4%, compared to an average annual return of 7.7% in months when the 10-year Treasury yield was 6%. was 14.5%.
“Stocks traditionally do very well in an environment where interest rates are definitely higher than 0% to 1% or 0% to 2%,” Belsky said. “So I think we're recalibrating it, but we also think the stock will be even higher at the end of the year by these levels.”
Belsky's research shows that stocks, on average, perform better in rising interest rate environments than in declining interest rate environments. His average one-year annual return for the S&P 500 is 6.5% in a declining interest rate environment, but 13.9% in a rising interest rate environment.
He argued that this makes sense given that one of the reasons the Fed continues to lower interest rates is the weak economic growth outlook. Belsky said raising interest rates may not be so bad for stocks given the current situation where the Fed feels the economy is in a strong position to handle higher borrowing costs.
“If you can stay in this 4% to 5% range (on 10-year Treasury yields), still have strong employment, and most importantly, have very strong earnings and, by the way, cash flow, the market “I think it's going to be very successful,” he added.[onthe10-YearTreasuryyieldandstillhavestrongemploymentbutmostimportantlyhaveverystrongearningsandohbythewaycashflowIthinkthemarketcandoverywell”headded[onthe10-YearTreasuryyieldandstillhavestrongemploymentbutmostimportantlyhaveverystrongearningsandohbythewaycashflowIthinkthemarketcandoverywell”headded
