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Do Stocks Offer Protection From Rising Rates?

Tyler Durden's picture


Submitted by Lance Roberts of STA Wealth Management,

There is a rising belief that when the Federal Reserve begins to taper that interest rates are set to rise.  It is believed that as rates rise due to stronger economic strength that the stock market will act as a hedge against falling bond prices. Recently, Blackrock attempted to answer this question by stating:

"Most investors fear rising interest rates. But perhaps more than the others, bond investors fear the loss of portfolio value that may occur when interest rates rise. Which begs the question – are there alternatives to bonds that might offer income and behave better in a rising rate environment? Indeed, global dividend stocks offer a compelling potential of income and outperformance in rising rate environments."

It is important to understand the underlying dynamic at play here which is that as interest rates rise - stocks will rise in price offsetting the decline in bond prices.  The chart below from Blackrock attempts to prove their case by showing a comparison between stocks and bonds.


However, is that really the story?  The problem with the data is that it is very selective in its construction.  What the chart doesn't discuss is what happened next.  

The chart below shows the 10-treasury rate from 1957 to present versus the S&P 500.  I have also noted with vertical dashed lines, the peaks in interest rate increases along with major economic events and recessions.  (Note: I have also noted the two relative market patterns of the current and previous secular bear markets.)


If you look at the chart closely a much different picture emerges from Blackrock's analysis.  As you will notice in almost all cases when interest rates rose sharply there was either a subsequent economic shock, recession and/or fairly significant market decline.

In order to more clearly show the analysis I constructed the following table which lists the start and end date of significant interest rate increases and the subsequent market selloffs.


Importantly, historically speaking the market has tended to have corrections in conjunction with rising rates as the economy was negatively impacted.  However, during the most recent history the negative impact was delayed by market momentum and liquidity driven booms.  Eventually, the market and economy, in all previous cases, has given way to the impact of higher rates.

The current rise in rates is the second largest in history on a percentage basis at 83.66% versus 85.59% during the 1976-80 period.  That previous spike in rates led to a 15% decline in the market in the middle of that spike. 

The recent rise in rates has already started to negatively impact the housing market and most likely the economy as we see deflationary pressures rising.  However, as I have recently discussed in "3 Myths About Rising Interest Rates:"

"The first misconception is that when the Fed tapers its ongoing liquidity program; interest rates will begin to rise.  However, there is no anecdotal evidence that would be the case as shown in the chart below."


"In fact, the recent rise in interest rates should have been anticipated as that has been the case during both previous programs.   It was not until the programs began to 'taper,' and eventually end, that rates fell as money flowed out of risk assets in search of safety in the bond market.  This fall in rates also corresponded to economic weakness and expectations of an increase in deflationary pressures.


When the Fed once again begins to remove its accommodative support from the financial markets it will likely lead to a further decline in interest rates as 'safety' is once again sought over 'risk.'"

Will stocks offer protection from rising interest rates?  Historically speaking rotating from bonds to stocks AFTER the spike in rates has occurred was akin to jumping from the "frying pan into the fire."


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Wed, 12/18/2013 - 17:41 | Link to Comment wallstreetapost...
wallstreetaposteriori's picture

frying pan into the fire... not today, not today.  Everything is bullish today.  As retarded at that statement seems, it is apparent that stocks will officially go to infinity.

Wed, 12/18/2013 - 18:04 | Link to Comment Obchelli
Obchelli's picture

Tomorrow First Time Unemployment benefits will surely fall from 563 K  by 40 or so K giving market nice headlines and reasons to continue celebration


Wed, 12/18/2013 - 18:05 | Link to Comment max2205
max2205's picture

Short rates to 7 years don't go anywhere unless the fed wants to move them 10 to 30 year is a little different

Wed, 12/18/2013 - 18:08 | Link to Comment CounterPartyVice
CounterPartyVice's picture

In the new normal stocks provide protection agaisnt interest rates going up and down, inflation, deflation, commodity prices, defaults and terrorists. In fact if you don't own stocks you may in fact be one of them.

Wed, 12/18/2013 - 17:46 | Link to Comment philosophers bone
philosophers bone's picture

This era of Fed intervention is the equivalent of the "steroid era" in baseball.  Put an asterisk beside every statistical record.  And stop the meaningless analysis of fundamentals and technicals.  Throw it all out, it has no empirical value.

Wed, 12/18/2013 - 17:45 | Link to Comment Seasmoke
Seasmoke's picture

Mickey Mantle agrees.

Wed, 12/18/2013 - 18:04 | Link to Comment philosophers bone
philosophers bone's picture

Apparently Barry Bonds is a ZHer.

Wed, 12/18/2013 - 17:46 | Link to Comment Seasmoke
Seasmoke's picture

The frogs are floating upside down.

Wed, 12/18/2013 - 17:57 | Link to Comment Big Johnson
Big Johnson's picture

It's different this time.

Wed, 12/18/2013 - 17:59 | Link to Comment Big Johnson
Big Johnson's picture

Actually my avatar is... Thought it made more sense to post with one more suited to my handle

Wed, 12/18/2013 - 18:06 | Link to Comment kito
kito's picture

haha, i love how the tone of these posts just changed. so instead of everything going to hell with tapering, and with rates barely moving up today, now its stocks that are offering protection from the taper!!!! the irony is too much for me to stomach today.  i thought lance was a doomer??!?!?!?  we are all looking like assholes right now!!!!!!!! (not saying we are, just looking like) CNBC is living it up!!! ALL HAIL THE MOTHERFUCKING SYSTEM BITCHEZZZZZZZ!!!!


Wed, 12/18/2013 - 18:27 | Link to Comment moneybots
moneybots's picture

"The first misconception is that when the Fed tapers its ongoing liquidity program; interest rates will begin to rise."


Rates have risen each time in response to QE. 


TNX is now pushing up against a downward trend line from 2007 peak.

Wed, 12/18/2013 - 18:38 | Link to Comment moneybots
moneybots's picture

Will the current broadening top pattern marked on the chart, mimic the earlier patterm?  If so, there is another touch of the declining trend line coming, which will put the SPX below 666.

Wed, 12/18/2013 - 19:10 | Link to Comment Papasmurf
Papasmurf's picture

If Marty was still around he would be worried.  "Use stops and cut back 4% for each one hit."

Wed, 12/18/2013 - 19:48 | Link to Comment ebworthen
ebworthen's picture

"Look at these mawkets!  You'd be crazy to be in bonds or cash!  Awg-ma-gog!"

Sure, get the sheeple to buy stocks, then crash the m'fucker all over again, again.

That is the plan.

Don't forget raising rates when everyone is in hock on their car loan, equity loan, mortgage loan, student loan, etc.

Just like old Alan Greedspun did in 2004 to bring about the housing/banking/insurer collapse "no one saw coming".

Cue Hank Fucking Paulson or his GS replacement to threaten CONgress to handover the taxpayers for ritual sacrifice.

Wed, 12/18/2013 - 20:17 | Link to Comment Billy Shears
Billy Shears's picture

Look, it sucks to get caught in a market down draft and loose 15 or 20% but the only take home from this chart, seems to me,is not to move, buy the best stocks you can and hold on, because one way or the other THEY (TPTB)  are gonna' get cha'.

Wed, 12/18/2013 - 21:28 | Link to Comment eclectic syncretist
eclectic syncretist's picture

If you buy now you'd be buying from the banksters.  Think about it.

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