It seemed to make sense to some people that if the Federal Reserve reigned in monetary policy and caused interest rates to rise, then stocks would suffer as debt financing cost rose for corporations and consumers.
Then again, the Fed would only allow rates to rise if it thought the economy was improving.
Also, when you look at the historical evidence, rising interest are associated with rising stock prices.
“Post-crisis, periods of rising bond yields have tended to coincide with rising equities,” said UBS’s Nick Nelson.
But the pace of the interest rate surge has left many global stock markets in the deep in the red.
“[W]e think it was the speed of the move that proved a problem as US Treasuries rose from 1.6% to 2.6% over just 8 weeks,” explained Nelson.
Still Nelson and the equity strategy team at UBS thinks that it’s a mistake to bail on stocks.
“We continue to be of the view that rising bond yields, from these ultra-low levels are bullish, not bearish for Global Equities, if they are rising for the right reasons,” added Nelson noting that this would be driven by expanding P/E multiples. “The problem over May and June was that the rise in yields was too rapid.
The most remarkable thing about about the market moves since the May 6 low in interest rates is that the U.S. stock market (represented by the S&P 500) is actually up 3%.
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