The big fear on Wall Street is that rising interest rates will snuff out the nearly 9-year-old bull market in stocks.
The debate over whether these fears are warranted will resume Wednesday when the Federal Reserve releases the minutes of its January meeting, when it left its key short-term rate unchanged at a range of 1.25% to 1.50%. Investors will be seeking fresh clues as to the Fed’s thinking about coming rate hikes in 2018.
Long-term rates already are rising, with the 10-year Treasury note nearing 3% early in 2018 and hitting a fresh four-year high of 2.93% on Tuesday. The Fed has signaled three quarter-point hikes to short-term rates are coming in 2018. But Wall Street, citing rising inflation, stronger economic growth and a tight job market, fears four increases.
Wall Street bears say the shift from record low rates to higher borrowing costs will hurt the economy and stocks.
But many Wall Street pros insist the stock market can thrive despite rising rates. The key, they say, is why rates are rising. If it’s due to faster GDP growth, that’s good for stocks, as a stronger economy means more sales and profits for U.S. companies. But higher rates caused by a big spike in inflation is viewed as a negative, as higher wages cut into profits and rising prices for consumer goods crimps spending.
For now, bulls say economic tailwinds will outweigh rising inflation. The S&P 500 stock index has posted average 12-month gains of 13.1% since 1950, when the yield on the 10-year Treasury was rising, vs. a gain of 12.4% when the yield was falling and 12.8% in all periods, Strategas Research Partners says.
The firm also cites the 1950s as a time when stocks and bonds rose in tandem. “In the 1950s, the 10-year yield went from 2% to 4.5% and stocks survived,” the firm noted.
