When interest rates start to rise, stocks will fall. Not only will they fall but our economy will tumble into a recession. Corporate credit will evaporate. Home ownership will cease. All dire consequences.

It’s true, rising interest rates do cause economic headwinds. But rates have been rising. In fact, they’ve risen a lot over the past couple of years.

Since July 2016, the yields on the 1-Month, 2-Year, 10-Year, and 30-Year Treasuries have risen substantially. The 1-Month T-Bill yield has risen 2,490%, the 2-Year yield has soared 384%, the 10-Year yield has climbed 135%, and the 30-Year yield has jumped 28%. Despite these rate spikes, the S&P 500 has gained 24% over the same time span.[1]

In addition to large cap stocks rising, small cap stocks have gained 30%, international stocks are up 12.56%, and emerging markets have added 10%. Not everything has risen during this two-year window. Bonds have dropped 8% and real estate investment trusts (REITs) are down 13%. An equally weighted portfolio across these six asset classes would have generated an average annual return of 9.3%.

Interest rates have been rising and falling for centuries. Below are a few substantial interest rates spikes for the yield on the 10-Year U.S. Treasury.

1983 to 1984 = 35%.

1987 = 46%.

1993 to 1994 = 57%.

1998 to 2000 = 58%.

2003 = 52%.

2008 to 2009 = 62%.

2012 to 2013 = 104%.

The average increase in yield for the 10-Year U.S. Treasury during these selected time periods was 59%. For the past 56 years the yield on the 10-Year has averaged 6.19%.[2]

If you purchased the S&P 500 in 1983, you would’ve made 1,511% – before dividends! Had you purchased stocks before any of the previous rate spikes, you’d still have significant stock gains today.

It’s hard to imagine our rates rising substantially from here, especially when other countries have much lower interest rates. When compared to other countries, our 10-year Treasury yield is substantially higher. France’s rate is .76%, Germany’s is .38%, the U.K.’s is 1.25%, and Japan’s is .09%. Australia has a comparable rate at 2.7%.[3]

Let’s look at other metrics to see if there is a case for higher interest rates.

The current unemployment rate is 3.7% which means 96.3% of Americans are working. Workers spend money – a positive for our economy.

64% of Americans own their own home. This rate has been consistent for the past 20 years.

Our current inflation rate is 2.1%, less than it was in 2008. The 91-year average for inflation has been 2.9%.

The current growth rate for the Gross Domestic Product (GDP) is 3.5%. The 71-year average GDP growth rate has been 3.2%.

West Texas Intermediate (WTI) Crude Oil is currently trading at $51.31 per barrel, down 33% from its peak in July. The average price for WTI for the past 32 years has been $43.75.

The Tax Cuts and Jobs Act lowered the corporate tax rate from 35% to 21%. Our tax rate was once the highest among developed nations, now it’s about average.[4]

Headline risk may keep a lid on the stock market in the near term, but the metrics for our economy look positive. Trying to time the stock market, or any market, based on one or two data points is futile. Anticipating the market’s direction is a loser’s game. Rather than playing the guessing game, focus on your financial goals and purchase a diversified portfolio of mutual funds so you can take advantage of the long-term trend of global markets.

Let the wise listen and add to their learning, and let the discerning get guidance. ~ Proverbs 1:5

November 23, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] https://fred.stlouisfed.org/

[2] Ibid

[3] http://www.wsj.com/mdc/public/page/mdc_bonds.html?refresh=on

[4] https://taxfoundation.org/us-corporate-income-tax-more-competitive/, Kyle Pomerleau, 2/12/2018