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, 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:Â 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.
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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.)
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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.
