What Rising Rates Mean for the Stock Market
Interest Rates Tick Upward
Outside of a minor uptick at the end of 2018, interest rates have been historically low for the past few years. Interest rates fell even further when the pandemic hit. For context, the average interest rate on a 30-year fixed-rate mortgage was about 5% ten years ago. A decade before that it was about 7%. Yet this rate has been below 3% for much of the pandemic.
Shorter term government debt yields like the 10-year US Treasury are even lower. In March 2020, the 10-year US Treasury yield hit 0.3%, a record low.
With that said, in recent weeks interest rates have been ticking upward. As a result, bond yields are rising and investors are now worrying about inflation. Some believe that too much fiscal and monetary stimulus will cause the economy to overheat. This could cause inflationary pressure which might cause the value of the dollar to fall.
Stock Market Recovers From Recent Losses
These recent trends—rising bond yields and concerns about inflation—have put downward pressure on the major stock indices over the past several weeks. This is partially because, when bond yields rise, they can become a more attractive investment compared to stocks.
Investors are also concerned that companies that relied on low rates to borrow money might have a harder time paying the interest on their outstanding debt. Mega-cap growth stocks like Apple (AAPL), Amazon (AMZN), Google (GOOGL), and Tesla (TSLA) have felt the most pressure. Their weakness has weighed on the Nasdaq Composite Index in recent trading sessions.
However, major stock averages traded higher yesterday as investors parsed through commentary from Federal Reserve Chairman Jerome Powell, who offered reassuring remarks to equity investors. He said that easy monetary policy is likely to stay in place because employment and inflation are still below the central bank’s goals.
Powell said that the central bank is “committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust as possible.” He also expressed that he does not believe current inflation trends are a threat to the economy.
The Fed changed its approach to inflation last year to include a policy of allowing inflation to average above 2% for a certain period before tightening policy.
While rising rates will certainly be on investors’ radar in light of the new stimulus bill that is working its way through Congress, Powell’s comments eased concerns—at least for the near term. The central bank’s policies are designed to keep interest rates low, which will make borrowing for both companies and consumers more affordable. This is meant to spur economic growth which could benefit people with mortgages and other debt.
The housing market has been an important part of the economy’s health and recovery. For now it appears that the Fed does not want to hamper that.
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