This month, Jason Weaver discusses rate hike cycles, bonds in rising rates and stocks in rising rates.
Rate Hike Cycles
The Fed is set to hike interest rates this year for the first time since 2018
High inflation since 1982 (CPI: 7.5%)
The market has priced in 6 rate hikes for the year
Main worry for economists/markets is that interest rates rise too quickly and dampens demand too much
Bonds In Rising Rates
Market interest rates and bond prices typically move in opposite directions
Example: A 10-year $1,000 bond paying a 3% coupon
– If market interest rates rise to 4% in one year, the bond will still pay 3%, but the bond’s value may drop to $925
The price dip is new bonds that may be issued with the higher 4% coupon, making the 3% bond less attractive unless someone can buy it at a discount.
The longer a bond’s duration, the more sensitive it will be to interest rate hikes, and the more its price will decline
Stocks In Rising Rates
U.S. stocks have historically performed well during periods when the Fed raised rates
A growing economy tends to support corporate profit growth and the stock market
Stocks averaged 9% (annualized) during the 12 Fed rate hike cycles since the 1950s
Positive returns in 11 of those 12 instances
