Stocks Can Rise, Even With Higher Rates

Key takeaways

  • YTD, U.S. stocks are off to a strong start, while bonds have struggled. Historically rising rates have led to a pull-back in stocks.
  • This year, stocks are proving more resistant to higher rates due to a few key factors. If this continues, stocks may gain from here.

Stocks are having another good year, bonds less so. During the first quarter, U.S. equity markets, as measured by the S&P 500, added another 10% to last year’s stellar gains, while most bond indices lost ground. Year-to-date the Barclays Aggregate Bond Index is down -1% and long-dated U.S. government bonds are off by roughly 3%. This leaves the question: Can stocks continue to advance in the face of higher rates? I believe they can.

I last discussed interest rates, bonds, and stocks last October. At the time, higher rates were leading stocks into a 10% correction. Both markets stabilized in late October and began climbing into year’s end.

This year, stocks are proving more resistant to higher interest rates. I’d attribute the resilience to four factors: a more muted backup in yields, lower bond market volatility, easier financial conditions, and a strong economy.