Fear Not Rising Interest Rates

Fear Not Rising Interest Rates

While there are reasons to fear rising interest rates as a bond owner, historical evidence shows that rising rates from such low levels is a positive development for the stock market. The facts tell us that long-term changes in the direction of interest rates, either up or down, can spark powerful secular (long-term) bull markets in stocks.

The chart below highlights pivotal points in interest rates (the circled peaks and valleys) from 1900 through present day. In each instance, as interest rate trends changed from either a high point or low point, a powerful new bull market in stocks emerged. The recent rise in US Treasury bond yields off of 60-year lows is similar to the lows we saw in the late 1940s. As rates moved off of those lows, it sparked a secular bull market that ran from 1949 to 1966. Similarly, rates declining from their peak in 1980 sparked a 20-year bull market that ran until 2000. In every instance, the stock market was also emerging from a decade or longer malaise, similar to what we have endured the past 13 years.

New bull markets are never obvious. Countervailing economic, political, and international turmoil chilled investors so much that they missed the early turn in the stock market in 1949 and 1980. Today, similar “noise” compounded by 24-hour news and Internet coverage keeps investors frozen by the reminder of the 2000 and 2008 conflagrations. In 1949 there were dozens of things to fear, from fear of another depression to the growing Cold War. But when pivotal points occur and markets have historically marched higher impervious to the “fears,” you must pay attention. Something may be changing for the positive; it just is not obvious, yet.

David Menashe is a Senior Vice President and Wealth Management Advisor, and Bruce Morley is a First Vice President and Wealth Management Advisor, for Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corporation. (858.381.8113)