Stocks have generally performed very well in rising-rate environments but the current rate cycle is unlike any other of the past 40 years, keeping investors on edge. A lot will depend on how inflation behaves.
So write Chris Marx and Alison Martier (blog.alliancebernstein.com) in edited excerpts from their original article* entitled This Rate Cycle Is Different, but Stocks Should Still Do Well.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
The authors go on to say in further edited (and perhaps in some instances paraphrased) excerpts:
Though we are in uncharted territory, history can still provide important clues about what may lie ahead. A study of global stock performance during the 15 bouts of rising 10-year US Treasury bond yields since 1970 showed that, on average, stocks tallied annualized gains of around 17% during these periods, outperforming their long-term average pace by roughly eight percentage points (Display 1).
The hitch here is that, for the past 30 years, these rising-yield episodes have been short-lived blips within a steady downtrend. Each uptick was followed by a downturn, often to lower lows (Display 2).
In most cases, bond yields rose as the Fed moved to clamp down on incipient inflationary pressures—but not so much that it damaged corporate profitability. The backdrop is very different today, with the U.S. economic recovery still fragile and inflation flat-lining.
Rising bond yields haven’t always been good for stocks, and the reasons behind this are instructive. This is particularly true for two of the three outliers: the early 1970s, which coincided with a persistent surge in inflation and stagnating GDP growth, and the Great Bond Massacre of 1993–1994, when strong real GDP growth fed production-related price pressures. In both periods, inflation trends provoked aggressive Fed intervention. Stocks appreciated in both cases, but significantly lagged versus their average historical gains.
The 1970s were marked by two massive back-to-back inflation spikes. Amid a booming economy and the 1973 OPEC oil embargo, the Consumer Price Index (CPI) more than tripled, to 12%, between 1971 and 1974, before falling by half the next year. Global stocks rose an annualized 2.2% during that period, significantly trailing their historical average pace of 9%, as well as inflation. Most of that underperformance came in the last two years, as stagflation set in.
Soaring energy prices and strong wage growth fueled another spike from 1977 through 1980, with the CPI reaching 15% before the Fed’s “scorched earth” tightening campaign and the ensuing recession brought inflation it under control. Interestingly, stocks did much better during this period—scoring a modestly above-average annualized gain of nearly 10%. Most of this outperformance occurred during the 1980–1981 bull market, as inflation and bond yields fell.
So what does history tell us? Context matters in how stocks perform in rising-rate environments, with inflation a key variable. We believe that,
- if bond yields rise in response to a stronger economy,
- but inflation expectations remain well anchored,
stocks should do well as companies benefit from improving demand and pricing power. If we get stagflation, as in the mid-1970s, then all bets are off.
With the economy still trying to gain traction, Fed tightening appears a long way off. Our economics and fixed-income investment teams anticipate a measured and gradual normalization of US monetary policy as the economy heals, and a commensurate rise in US bond yields from today’s exceptionally low levels. On that basis, we think the prognosis for stocks looks good.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://blog.alliancebernstein.com/index.php/2013/08/08/this-rate-cycle-is-different-but-stocks-should-still-do-well/ (©2013 AllianceBernstein L.P.; Nelson Yu, Deputy Head of Quantitative Value Research, contributed to the research in this report.)
The Dow has begun a major rally 13 times over the past 112 years which equates to an average of one rally every 8.6 years so, as it stands right now, the current Dow rally that began in March 2009 would be classified as well below average in both duration and magnitude. Read More »
Are stocks in a bubble? While leverage has returned to the stock market driving up stock prices and aggregate demand in the process, margin debt is still shy of its all-time high as a percentage of GDP, so there is certainly some headroom for further rises. A look at the following 5 charts illustrate that contention quite clearly. Read More »
There’s nothing to be bearish about regarding the stock market these days. I’ve reviewed my 9 point “Bear Market Checklist” of indicators and it is a perfect 0-for-9. Not even one indicator on the list is even close to flashing a warning sign so pop a pill and relax. There’s no immediate danger threatening stocks. Read More »
Right now there’s nothing to be bearish about. I say that with conviction, because my “Bear Market Checklist” is a perfect 0-for-9. Heck, not a single indicator on the list is even close to flashing a warning sign. We’ve got nothing but big whiffers! Take a look. Pop a pill and relax. There’s no immediate danger threatening stocks. Read More »
There are several fundamental reasons to believe that this week’s stock market activity, where the S&P 500 has moved more than 4% above the 13-year trading range defined by the 2000 and 2007 highs, could mark the beginning of a long-term bull market and the end of the range-bound trading that has lasted for 13 years. Read More »
Today, I’m dishing on the unbelievable rebound in residential real estate, pesky rumors about the dollar’s demise and a resurgent U.S. stock market. So let’s get to it. Read More »
U.S. stocks are off to one of their best starts in years. Most indices are up 10% year to date, prompting many investors to ask: “Are we in another bubble?” The answer is no, at least when it comes to equities. Here are three reasons why:
The mainstream financial press would like us to believe that because the S&P 500 and Dow 30 are at or near their record highs that it must mean we’re nearing the end of the current bull market and, as such, now must be a terrible time to buy stocks. Let’s not jump to any conclusions, though. Instead, let’s do our own due diligence to find out. Hint: If you’ve been stuffing cash under the mattress since the last market crash, you might want to finally go deposit it in your brokerage account. Here’s why… Words: 420
While I remain cautious on stocks and the risk trade, the technical picture shows that the uptrend to be intact and the bulls should still be given the benefit of the doubt for now. At this point, any call for a correction is at best conjecture [as evidenced by the following 4 indicators]. Words: 399; Charts: 4
The Swimsuit Issue Indicator says that U.S. equity markets perform better in years when an American appears on the cover of Sports Illustrated’s annual issue as opposed to years when a non-American appears on the cover. [What is the nationality of this year’s cover model? Can we expect returns above the norm or will we see a year of underperformance for the S&P 500 this year? Read on.] Words: 323 ; Table: 1
As we all know, money printing always leads to inflation. It’s just a matter of figuring out which assets get inflated. This time around gold is not the only beneficiary, stocks are, too, and I’m convinced that the chart below holds the key to the end of the bull market. Words: 475; Charts: 1
Ever since the Dow broke the 14,000 mark and the S&P broke the 1,500 mark, even in the face of a shrinking GDP print, a lot of investors and commentators have been anxious. Some are proclaiming a rocket ride to the moon as bond money now rotates into stocks….[while] others are ringing the warning bell that this may be the beginning of the end, and a correction is likely coming. I find it a bit surprising, however, that no one is talking of the single largest driver for stocks in the past 4 years – massive monetary base expansion by the Fed. (This article does just that and concludes that the S&P 500 could well see a year end number of 1872 (+25%) and, realistically, another 28% increase in 2014 to 2387 which would represent a 60% increase from today’s level.) Words: 600; Charts: 3
For the month of January, U.S. stocks experienced the best month in more than two decades [and the Dow hit 14,009 on Feb. 1st for the first time since 2007]. Per the Stock Traders’ Almanac market indicator, the “January Barometer,” the performance of the S&P 500 Index in the first month of the year dictates where stock prices will head for the year. Let’s hope so…. [This article identifies f more solid reasons why equities should do well in 2013.] Words: 453
As Winston Churchill once said: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty” and in that vain I challenge all readers to fight off the negativity, see long-term opportunity in global equity markets and, most importantly, remain invested. Your future self may thank you. Words: 732; Charts: 6