Why Stocks Can Survive Bond Market Bumps

In this article, Russ Koesterich discusses the reason behind the recent resiliency of stocks, despite rising rates.

Key takeaways

  • Typically, a back-up in rates has led to a sell-off in stocks. We believe the current environment is different for three reasons: the degree of the move in rates, current economic cycle, and strength of mega-cap technology.
  • In this environment, we would advocate for maintaining an overweight to equities, with a barbell structure for sector exposure.
  • Within fixed income, we suggest a modest underweight to duration notably via long-term bonds with exposure focused on spread-related products as a complement to risk assets.

So far in 2024, stocks have continued to build on 2023’s gains but bonds are having a tougher start to the year. Stronger than expected economic data coupled with a steady stream of supply have pushed yields higher. Year-to-date, broad bond indices such as the Bloomberg US Aggregate Index is down around 1%, while long dated U.S. Treasuries are under more pressure, lower by roughly 4.5%.

Two years-ago an historic rout in bonds led to a sell-off in stocks, particularly growth names. Why have stocks proved more resilient in 2024? I would highlight three reasons: the modesty of the rate backup, the current economic cycle, and the earnings power of mega-cap tech. All of which suggest stocks can withstand the occasional sell-off in bonds.