Why Higher Rates Aren’t Bad For Stocks
Rates continue to move higher, as the economy improved, more inflation expectations heat up, and more stimulus is coming. As a result of higher rates, stocks have seen some weakness, with growth stocks taking the majority of the selling. This week, Chief Market Strategist Ryan Detrick and Equity Strategist Jeffrey Buchbinder discuss why higher rates historically haven’t been bearish for stocks and don’t think they will be this time either.
Rising rates are usually bullish for stocks
Historically, the S&P 500 Index has advanced during extended rising rate periods almost 80% of the time and there are some positive signs that stocks may tolerate the current rising rate environment well. The LPL Strategists note that S&P 500 has tended to perform better in rising rate environments when:
- The starting point for rising rates is low, as it was this time.
- We are not in an extended period of high inflation, which we are well clear of.
- Rising rates are accompanied by strong yield curve steepening, which is what we’ve been seeing.
More of the same from value and growth
Growth stocks had another bad week last week, with higher rates the main reason. The LPL Strategists noted that higher yields tend to be a tailwind for financials, which are a very important group. Meanwhile, other cyclical value names like materials, energy, and industrials are all doing better thanks to prospects of a red hot economy later this year. But the strategists aren’t giving up on growth quite yet, as there are still opportunities in the group and this recent weakness could be a nice opportunity.
The Fed holds pat
Federal Reserve Chairman Jerome Powell spoke last week and stated he wasn’t concerned with the higher move in rates, which of course sparked another move higher in rates. With another $1.9 trillion stimulus plan set to be passed this week, more stimulus is indeed on the way. The strategists discuss this, along with the very strong jobs print from last week, suggesting the economy is opening up quickly, as most of the gains came from the hard hit services area.
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All index data is from FactSet.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This Research material was prepared by LPL Financial, LLC.
For Public Use — Tracking #: 1-05118816 (03/22)