On March 15, 2017, the Federal Open Market Committee (FOMC) within the Federal Reserve System, voted to increase the federal funds rate for the third time in this monetary tightening cycle. Due to the timeframe since the most recent rate hike in December, many are wondering if, when, and how this might affect the stock market.
The chart below, provided by Ned Davis Research, shows the relationship between the S&P 500 and 10-year Treasury note yields going back to 1963. Conventional market wisdom used to dictate that stock prices and bond yields generally have an inverse correlation – As interest rates rose, inflationary fears were heightened and stock prices would suffer.
However, this correlation has turned mostly positive in recent years, as extraordinary monetary policy has kept rates low. As the chart below suggests, yields and stock prices seem to move together until the 10-year treasury notes crosses above 4%. Why might this be?
We believe that from very low levels, rate hikes are reassuring to equity investors who are eager to see economic growth and modest inflation after the financial crisis of 2008. Increases could be viewed as a vote of confidence by the FOMC.
With the 10-year treasury yield currently at less than 2.5%, and inflation in check, we see recent rate hikes as a positive indicator for stocks…for now.
The Standard & Poor’s 500 Index is a capitalized weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing major industries. The S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.