RISING INTEREST RATE IMPACT ON BONDS AND STOCKS (1971 – 2015)
Source: Morningstar, Compustat
It makes sense that the 10-year US Treasury Bond lost an average of 4.0% annualized as the 10-year rate increased due to the mathematical inverse relationship of bond prices to yield. The fact that stocks tend to perform well during these periods is a less discussed phenomenon. This means rising interest rates should be a cause for excitement rather than concern for equity investors.
Since last month’s election through December 27, the 10-year US Treasury Bond rate has already jumped by 0.80%, while the S&P 500 gained 8.6%. It appears that growth and inflation are on the rise, positive signs for continued stock market performance. Stocks do well in this kind of environment as the benefits of earnings growth more than offset the negative impact of rising rates on stock valuations. Furthermore, stocks have proven to be an excellent hedge against inflation.
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