Will Interest Rates Collapse The Market?

Last week’s spike in interest rates caused a bit of a sell-off in the market. Will rising interest rates kill the momentum of our high-growth stocks?

Today’s Big Hitter: Interest Rates

I know, I know — I’m talking about interest rates on a Tuesday morning. Bear with me though, this won’t be as boring as you think (I hope).

Towards the end of last week, the markets took a bit of a tumble, with the S&P 500 falling almost 3% from its mid-week high, while both the Nasdaq and the Dow Jones closed the week down 2.5% and 2% respectively.

What gives? I thought stocks were only supposed to go up!?

So what happened?

Over the past few years, interest rates in the U.S. have been historically low. This is cited as the reason why (at least in part) the equity markets have performed so well over the same period. With little to no returns guaranteed from investments in bonds, money has been flooding into the market and, in particular, high-growth stocks and IPOs.

However, last week the 10-year Treasury yield, often used as a benchmark for fixed-rate mortgages and some other forms of consumer debt, hit a peak of 1.54% — a level not seen since before the COVID-19 pandemic. 

This stoked fears of inflation, as well as concerns about the valuation of some high-flying stocks at the moment that are trading at many multiples of their earnings (if they even have earnings, that is). 

The yield has since fallen back down, but jitters still remain. So what gives? Do high interest rates automatically equate to poor market conditions?

Of course, there’s no clear answer to this. In a recent article, Michael Batnick recalled that, during the Dot-Com Bubble of the early 2000s, the 10-year Treasury Yield was more than 6%! Clearly there is not an automatic inverse correlation between interest rates and market performance.

It is important to remember that interest rates do affect companies that have a lot of debt on their balance sheet. Low rates equals lots of money to borrow, while high interest rates means that growth through cheap credit is curtailed. 

The most important takeaway for long-term investors, however, is that there is no one signal that will determine what the markets will do next. Much like the fascination people have with the inverted yield curve, rising interest rates are only part of a much wider picture.

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