Is it that simple?
Interest rates down/stocks up. Interest rates up/stocks down. While perhaps oversimplified, that has been the norm in the financial markets since early 2022. As Fed chair Powell & Co. unleashed their full assault on inflation by aggressively raising interest rates in March of last year, stocks began to fall. The most stunning rate rise in history crippled the stock market and triggered a bear market. After a strong rally that was sparked last November by “mega-cap tech stocks” expected to benefit from AI, a new bull market ran through July of this year. Then the interest rates up/stocks down syndrome hit stocks again. Higher rates by all measure knocked the stock market into a correction by mid-October, and by month’s end concerns of a further fall into new bear market territory surfaced. The benchmark 10 year Treasury bond yield reached 5% in mid-October for the first time in almost 20 years. This rate was near zero in recent years. Even just three months ago the 10 year yield was 3.95%. It shot up over 25% from there. Incredible fund flows out of stocks and into bonds occurred. And then… interest down/stocks up. That’s where we are now.
The sharp drop in the 10 year Treasury yield in just the last week stoked a broad based, convincing rally in stocks. What a difference a week makes! From the lows in Nasdaq last Friday to now, the index scored nearly an average year’s worth of gains. It was the best week of the year for the stock market.
No, it is not simple. But, the impact rising interest rates have on the stock market real. Especially when rates were in a “lower for longer” mode since the Great Financial Crisis of 2008-2009. The market has had to adjust to a “higher for longer” interest rate world since last year. That new rate reality has resulted in more stock market volatility than usual.
We simply must remember, it’s time in the market; not market timing, that makes for successful investing. Also, a diversified investment plan is essential to consistent positive returns whether interest rates rise or fall.
