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 dating back to 1990, Belsky found that the S&P 500's monthly returns actually produced the highest annual average returns when 10-year Treasury yields (^TNX) were high.
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%.
“In an environment where interest rates are definitely higher than 0-1% or 0-2%, stocks traditionally do very well,” Belsky said. “So I think we're recalibrating it. Even by these levels, we still think the stock will be even higher at the end of the year.”
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 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 maintains or lowers interest rates is the weak economic growth outlook. Belsky said raising interest rates may not be so bad for stocks given the current backdrop where the Fed feels the economy is in a strong position to handle rising borrowing costs.
“If we can stay within this 4% to 5% range, [on the 10-year Treasury yield] “And employment remains strong, but most importantly, earnings are very strong and, by the way, in terms of cash flow, I think the market could do very well,” he added.
