Tags: interest | rates | stock | yield

USA Today: Stock Market Can Withstand Rising Rates ... Up to a Point

By John Morgan   |   Thursday, 11 Jul 2013 08:01 AM

Wall Street fears that spiking interest rates would end the bull market are so far way overblown, and, in fact, stocks hit new all-time highs recently, but the trend has not finished playing out.

Since the Federal Reserve first hinted in May that it would cut back on its ultra-loose monetary policy, the yield on the 10-year Treasury note has jumped from 1.63 percent to a near-two year high of 2.72 percent last week.

But why is the stock market ignoring the rise in interest rates?

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

James Stack, president of InvesTech Research, said the Fed's conclusion that the economy is healthy enough for a stimulus pullback is actually a bullish sign

"The rise in long-term rates is due to an assessment that the economy is doing better, and that is good news," he told USA Today.

According to James Paulsen, chief investment strategist for Wells Capital Management, the rising rates are being offset by a parallel rise in consumer confidence. He said that in periods of increasing rates since 1967, the Standard & Poor's 500 has enjoyed gains of nearly 13 percent when consumer confidence is also increasing.

"It's not a bad thing when bonds are being repriced because the world is not coming to an end," Paulsen told USA Today.

Another factor in the positive backdrop for stocks is that inflation is tame, USA Today said. Inflation at the consumer level was only 1.4% in May, considerably lower than the 2 percent Fed target.

However, Stack warned that if interest rates continue on an upward trajectory, they could overwhelm the stock market.

"The 10-year note would need to rise another (1 percentage point), to around 3.5 to 4 percent, before we will see a broader stock market impact," he said.

The nature of the recent interest rate increases is actually more benign than more cautious market pundits have feared, according to MarketWatch.

In fact, because the greatest increases have come at the longer end of the maturity spectrum, the yield curve since May has become steeper — the opposite direction from what one would expect if a new recession was brewing, MarketWatch reported.

The yield curve is also steepening in corporate bond rates, another bullish sign, MarketWatch said.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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