Are Rising Rates Really That Bad for Stocks?
I have been making comments that it is is not so much the fact that rates are rising that causes the stock market to throw a tantrum but rather the pace at which they rise. I took a look at data going back to 1998 and what we have just witnessed is the fastest spike in rates ever in that period. And, yes, the stock market is throwing a bit of a tantrum. So I decided to take a look at how this truly impacts the stock market over the next 63 days (one quarter of trading).
I ran a test that looked at all instances where the 20 period rate of change of the 10-year yield was greater than 25. This is admittedly a small sample size at only 51 instances but there are some interesting results. The green arrows on the charts.
For the SPDR S&P 500 ETF (SPY), the fund is actually higher one quarter later 89% of the time for a median return of 6.79%.
The same is true for small caps. The iShares Russell 2000 ETF (IWM) is higher 91% of the time for median return of 6.31%.
The Invesco QQQ Trust (QQQ) takes the longest to get going to the upside but it eventually does. It finishes higher a quarter later 95% of the time for a median return of 11%. This one actually surprised me.
Interestingly, bonds tend to keep falling (rates keep rising), closing lower 63% of the time for a median loss of 0.36% over the next three months. Here is the iShares 7 - 10 Year Treasury Bond Fund (IEF).
This begs the question, are rising rates all that bad for the stock market? I guess it comes down to, why are they rising? Rates generally rise as the economic outlook is improving. That should be a positive for stocks once they adjust to the initial “shock” of the spike in rates. Here is a look at Initial Unemployment Claims ticking lower again yesterday.
I have no idea if it will play out the same way this time or if rates are going to continue to rise. I simply found this study interesting. This is buy no means a call on some future outcome. As always, trend work will continue to dominate.
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