Risk Assets Tied to Interest Rates

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Stocks often underperform when the Fed pivots hawkish. In 2021, for example, the Fed shifted to combat inflation and signaled rate hikes, triggering a year-long bear market in SPX:

Rising short-term rates hurt several sectors in the S&P 500. Banks and the Financial sector pay interest on deposits. Real Estate development slows. Industrials and Utilities pay higher rates on expensive infrastructure projects. Consumer financing slows.

Bond prices move inversely to interest rates. When bond prices fall rapidly, bond volatility spikes. Because institutions use bonds as financial collateral, sudden price swings force lenders to demand more cash buffer, draining overall market liquidity. Thus dampening appetite for risky assets.

This explains the SPX’s malaise for the past two months. Yet despite these headwinds, the index has remained remarkably resilient. For this to continue, tech and earnings must remain strong.

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