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%
|
|
July 1961 to November 1966
|
4.6%
|
+21%
|
|
May 1967 to September 1969
|
5.2%
|
+5%
|
|
March 1971 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
|
3.1%
|
+10%
|
|
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!
Disclosure
1 The Washington Post. January 26, 2022. https://www.washingtonpost.com/business/stocks-dont-rise-or-fall-because-of-interest-rates/2022/01/25/25d23e7c-7dd7-11ec-8cc8-b696564ba796_story.html
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 The Federal Reserve. Bloomberg. 2022.
4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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