Stock Market Investors Shouldn’t Fear Higher-for-Longer Interest Rates

• Investors need not worry about higher-for-longer interest rates, according to BMO’s Brian Belski.
• He noted that stocks have historically performed just fine during periods of rising and elevated interest rates.
• These four charts prove Belski’s bullish stance even as the Federal Reserve signals no imminent rate cuts.

Investors are starting to wake up to the fact that the Federal Reserve may not cut interest rates in 2024 following hawkish commentary from Fed Chairman Jerome Powell on Tuesday.

That’s in stark contrast to expectations at the start of the year that the Fed would cut interest rates as many as seven times as disinflation showed continued progress.

But a string of hot inflation reports since January has given Powell pause in his commitment to cut interest rates this year, leading to a spike in volatility for the stock market.

However, according to BMO investment strategist Brian Belski, the stock market should perform just fine during a period of rising and elevated interest rates.

“Our work shows that investors should not fear higher rates, despite current conventional thinking to the contrary. In fact, we found that some of the strongest periods of S&P 500 performance have coincided with rising or higher levels of interest rates over the past few decades,” Belski said in a note on Tuesday.

Belski argued that the near-zero interest rates investors have grown accustomed to following the 2008 Great Financial Crisis “were never normal” and that while there will be fits and starts in investors acclimating to higher rates, overall it should be a positive backdrop for stocks.

“While we do subscribe to the ‘higher-for-longer’ interest rate narrative, we are less concerned than investors about recent levels and trends. Current conventional thinking seems to suggest that any form of higher yields is automatically bad for stocks. However, our work shows quite the contrary,” Belski said.

And according to Belski, the reasoning as to why stocks perform better during periods of rising interest rates than compared to falling interest rates, is the economy.

“Lower rates can be reflective of sluggish economic growth and vice versa,” Belski said.

These four charts prove Belski’s point.

1. Higher interest rates have not impacted stocks historically

Belski highlighted that since 1990, the S&P 500 delivered its higher annualized performance when the 10-year Treasury yield was greater than 6%.

The 10-year Treasury yield is sitting at about 4.60%, which is consistent with an annualized S&P 500 return of 9.1%. That’s well above the stock market’s annualized return of 7.7%, which occurs when interest rates are below 4%.

2. The S&P 500 has performed better when interest rates were rising

Belski crunched the numbers and found that since 1990, the S&P 500 has delivered stronger performance when interest rates were rising than when they were falling. In fact, the S&P 500’s average rolling one-year performance was more than double when rates were increasing compared to when they were falling.

3. There have been 8 times since 1990 when interest rates were rising

Since 1990, there have been eight periods when interest rates were on the rise, and during each of those periods, stocks saw positive performance.

4. Stocks rose during every period of rising interest rates since 1990.

Belski highlighted that during each of the eight periods in which interest rates were rising since 1990, the S&P 500 posted positive performance.