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Sound Advice: March 23, 2022

Interesting Returns 

Although the pandemic and the situation in Ukraine remain important concerns, Wall Street has become increasingly focused on unusually high (albeit perhaps temporary) inflation and prospective actions by the Fed to get price increases under control.  Some days, the investment markets react dramatically to developments in this area.  On others, apparent calm prevails.

However one views what lies ahead for interest rates, there are certain realities.  As rates rise, prices for bonds fall, especially for those with long maturities.  The offset, though, is the increasing attractiveness of bonds when interest yields on bonds compare more favorably to dividend yields on common stocks.

To get a clearer view of the impact of rising interest rates on stocks, I compared the annual changes in interest rates on bonds to the annual returns from the S&P500 stock index for the last 50 years.  Over the five-decade span, rates rose in as many years as they fell.

But there was a marked difference between stock market performance during periods of rising or falling rates.  When rates rose, the S&P Index advanced 8.3%.  When rates fell, the index climbed 10.5%.

What is surprising is that the stock market rose in as many years as it fell over the period.  Even so, when rates rose, stocks lost ground in twice as many years as when rates fell.

These observations, of course, speak to the path of the stock market generally.  But whether viewing stock market performance through the lens of mutual funds, exchange-traded funds or individual stocks, it is equally clear that the impact of interest rates tends to have less of an effect on companies with stronger finances, those that have little or no need for debt financing.

Yes, rising interest rates may provide a headwind to the stock market as a whole, but the stock market as a whole is made up of thousands of stocks, some of which will feel little or no effect.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370 

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

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