Here’s What Happens to Stocks When Rates Rise

It’s been worrying investors for the last few years, especially over the last couple of weeks – rising rates. The narrative is simple: rising rates are bad for stocks. When rates rise, sell stocks.

Here’s why investors are worried. US 10-Year Treasury yields are reaching levels we have not seen since 2013.

Source: Thomson Reuters

The data however suggests otherwise. In fact, right up until the 10-Year yield gets up to about 5%, stocks and bonds yields historically have been positively correlated. History tells us that it’s perfectly normal for rates and stocks to rise at the same time.

Here’s a great chart by JP Morgan highlighting the correlation between stocks and interest rates since 1963.

Looking into this even further, here’s LPL’s John Lynch:  “…the chart below shows that out of the most recent 23 periods of higher rates (based on the 10-year Treasury yield), stocks have gained ground 19 of those times. Recent periods have produced even better performance, as stocks have risen during each of the last 11 periods of rising rates (since 1996). Stocks have done well since interest rates began to move higher in September 2017.”

Here’s another vantage point:

History suggests that higher rates may actually be a good thing, and should the 10-year Treasury yield break above the psychologically important 3% level, the equity bull market may garner further support.

Don’t be fooled however. Rising rates from higher levels is a problem for stocks. We’re just not there yet.