The stock market can thrive even in the face of rising interest rates, chief investment strategist says

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  • The stock market can still rise in the face of high interest rates, according to BMO’s Brian Belski.
  • Belski found that above average US 10-Year Treasury yields coincided with a near 10% average gain for stocks.
  • “Our work shows that the S&P 500 has historically performed quite well in higher interest rate environments,” Belski said.

High interest rates won’t keep the stock market down forever, according to chief investment strategist Brian Belski of BMO, who observed in a Monday note to clients that the S&P 500 has actually printed healthy gains during high interest rate environments.

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There’s good reason for stock prices to fall when the Fed is hiking interest rates. For one, higher interest rates impact a company’s cost of capital and could reduce profits if they have to pay more interest when raising debt.

Additionally, higher interest rates offer investors an alternative to stocks in the form of higher-yielding bonds and money market funds, which is especially appealing after a decade of near-zero interest rates.

“However, our work shows that the S&P 500 has historically performed quite well in higher interest rate environments and during rising rate cycles, despite perceptions to the contrary,” Belski said. “History tells us that a higher interest rate backdrop does not represent a detriment to US stocks.”

Belski found that when the 10-year US Treasury yield was above its 3-year moving average, as it is today, the S&P 500 returned an average one-year gain of 9.3%, with double-digit percentage gains occurring 55% of the time.

Even during periods of prolonged periods of rising interest rates, the S&P 500 printed an average annualized price return of 10.7%. And in the past six rising interest rate cycles, the S&P 500 has delivered annualized gains of more than 10%.

This may be a head-scratcher to investors who have been conditioned to equate rising interest rates with falling stock prices, but it does make sense when you consider that the Fed has a tendency to raise interest rates during a time of economic strength. 

Despite high inflation, there’s plenty of strength in today’s economy, evidenced by third-quarter GDP growth hitting 2.6% and year-to-date job gains of more than four million.

Finally, conclusions of Fed tightening cycles also tend to be positives for market performance, according to Belski’s analysis. Aside from the months after the May 2000 cycle-end, “the S&P 500 has largely moved higher throughout the nine-month period when the Fed stopped raising interest rates.” 

That means any potential pause in the Fed’s current interest rate hike cycle can coincide with sizable gains for the stock market, based on Belski’s analysis.

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