Rising rates don’t spell the end for stocks.
Looking at the past six rate hike cycles, stock have generally held strong despite initial wobbling around rate increases, writes Bob Doll, Chief Equity Strategist, and Scott Tonneson, portfolio manager, of Nuveen Asset Management. Stocks decline a bit immediately after an interest rate rise, but they will recover and even outperform after, although increased volatility is likely.
What the markets are doing today isn’t unusual. During a given cycle, the Fed cuts rates to allow the economy to grow before beginning to increase rates, triggering the second half of economic growth, Nuveen writes. “Today we believe the United States has reached that inflection point: Economic growth has been slower than typical recoveries and expansion, but it is gradually accelerating,” they write. Inflation looks a bit more complicated, but it too is changing.
On the up side, having a low starting point for raising rates should help stocks. “An environment of low and upward moving rates can be a good backdrop for equities,” writes Nuveen. Equities don’t do so hot when yields are on the upward climb. But stock price do rise significantly when yields are low and starting to climb. The 10-year Treasury yield now just is about 2.25%, much lower than the average 7% other times the Fed raised rates.
Photo: Nuveen.com.