Interest rate uncertainty is putting pressure on stock markets

Interest rate uncertainty is putting pressure on stock markets

The mood on the stock markets was generally positive at the beginning of 2024, primarily due to the expectation of falling key interest rates in the USA. However, uncertainty surrounding interest rate cuts later caused turbulence. This was due to unexpectedly high US consumer prices, which threatened the Fed's inflation target of two percent. The economic expansion in the US increased this uncertainty, leading to shifts in interest rate expectations.

Despite the increasing volatility on the stock markets, BMO investment strategist Brian Belski remains calm and sees no reason to worry. He is convinced that the stock market will continue to perform well even with higher interest rates. Contrary to popular belief that rising interest rates are negative for stocks, Belski emphasizes that this is not necessarily true. According to his work, strong periods of S&P 500 performance were often associated with rising or higher interest rates.

Belski argues that the near-zero interest rates following the 2008 financial crisis were not the norm and higher interest rates are fundamentally positive for stocks. He explains that low interest rates can indicate slow economic growth, while higher interest rates signal the opposite. Using graphs, he shows that historically higher interest rates have not had a negative impact on stocks. In fact, since 1990, the S&P 500 has had higher annualized performance when the 10-year Treasury yield was above 6 percent.

Furthermore, BMO analysis shows that since 1990, the S&P 500 has performed stronger when interest rates rose compared to when interest rates fell. In total, there have been eight periods of rising interest rates since 1990, and in each of these periods stocks performed positively. This suggests that stocks tend to perform better during periods of rising interest rates.