Will Higher Interest Rates Tank the Stock Market?

The idea that rising interest rates mean bad news for stocks is not historically accurate—in fact, the opposite is generally the case. Do Rising Interest Rates Mean Falling Stock Prices? Long-time readers of this column know I rarely focus on day-to-day changes in the stock market. Short-term price movements bear very little weight on long-term outcomes. But the setup for this week’s topic is best achieved by looking back on market action from January 5, 2022. On that day, the Federal Reserve released minutes from their December 14-15th meeting, and long story short, market participants learned that interest rates were going to move up higher and faster than previously expected. Stocks sold off sharply on the news, with the Nasdaq posting its worst single-day loss since February 2021. Questions started to swirl about the impact rising interest rates would have on stocks. The consensus seemed to be that rising rates are problematic – they would result in multiple compression over time, and in the short-term would deal a major blow to high valuation stocks, like high-flying ‘growthy’ tech names. The thinking was that January 5th trading action was a sneak preview of how the market could respond to interest rate increases in the future.1 --------------------------------------------------------------- [Does Rising Interest Rates Mean More Volatility is Around the Corner?]( While rising interest rates could mean more market volatility, there are still ways you can protect your investments. Inflation and volatility are two common factors that every investor faces, but history shows that the market eventually recovers. With so many unknowns surrounding the market, remember to think long-term and focus on key data that can help guide your financial decision making! To help you focus on factors that can protect your investments through market volatility, I am offering all readers a look into our just-released February 2022 Stock Market Outlook report. This report will provide you with our forecasts along with additional factors to consider: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces optimism in 2022?? - Zacks forecasts for 2022 - Zacks ranks industry tables - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT’S FREE. Download the Just-Released February 2022 Stock Market Outlook2]( --------------------------------------------------------------- Rising interest rates could certainly give way to higher volatility in 2022. But history tells us that rising interest rates do not necessarily have to mean falling stocks – in fact, the opposite has been true throughout history: Fed Raising Rates Change in Fed Funds Rate over the period S&P 500 Index Price Change over the period July 1954 to October 1957 2.7% +33% May 1958 to November 1959 3.4% +32% May 1967 to September 1969 5.2% +5% March to September 1971 1.8% -2% February 1972 to July 1974 9.6% -26% January 1977 to July 1981 14.4% +28% February 1983 to August 1984 3.0% +13% March 1988 to March 1989 3.3% +14% December 1993 to April 1995 2.7% +33% January 1999 to June 2000 1.9% +14% June 2004 to July 2006 4.2% +12% November 2015 to January 2019 2.3% +30% Source:Federal Reserve; Bloomberg3 Indeed, the conviction that rising interest rates will hurt stock returns is more of a theoretical talking point – not an idea supported by data. Over the last 140 years, the correlation between the 10-year U.S. Treasury bond yield and the cyclically adjusted price-earnings ratio for U.S. stocks is -0.21. Meaning, rising interest rates may lead to multiple compression some of the time, but not reliably. Looking closely at the table above, readers will see that the Federal Reserve has carried out 13 monetary tightening campaigns, featuring several rate hikes in each. The S&P 500 went up in all but two of them, delivering a median gain of +14% (price return) while the Fed was actively raising rates. Rising rates do not necessarily mean falling stocks – in fact, they rarely do. The two exceptions in the table above were 1971 during which the market declined by -2%, and 1972 to 1974 when the decline was much bigger. In those years, however, the U.S. economy was mired in recession due to the oil embargo, so the reason for the S&P 500’s decline arguably was because of more than just higher interest rates. There’s a good explanation, in my view, for why stocks have historically done well when the Federal Reserve is actively raising the fed funds rate. That is – the Fed is usually raising rates in response to a strong economy! Indeed, monetary tightening is usually in an effort to tighten financial conditions and cool the economy, which is precisely what we are seeing today as the Fed seeks to temper demand and inflation. In 11 of the 13 rate hike regimes listed in the table above, the Fed was doing just that, and stocks arguably went up every time because the economy kept growing. I think that’s what we’ll see in 2022 as well. Bottom Line for Investors I have written before that bull markets usually end on the Fed’s last rate hike, not their first one. We may eventually arrive at a place where bond yields are higher than equity yields, and/or the yield curve is completely flat or inverted – meaning bonds are more attractive than stocks, and growth conditions will be challenging ahead. We’re not there yet in the current environment, and I do not see those conditions emerging in 2022. In the meantime, historical data suggests we should embrace these early rate hikes – not fear them. Knowing this, I recommend that investors focus on factors that can protect their investments through market volatility. So, to help you do this, I am offering all readers our [Just-Released February 2022 Stock Market Outlook Report](. You’ll discover Zacks’ view on: - Zacks Rank S&P 500 Sector Picks - Zacks view on equity markets - What produces optimism in 2022? - Zacks forecasts for 2022 - Zacks ranks industry tables - Sell-side and buy-side consensus - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [FREE Download – Zacks' February 2022 Stock Market Outlook Report4]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Let's Set Up a Talk]( Don't put off planning your secure, happy retirement! 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