Relax: Those rising bond yields aren't going to kill stocks

Trading Nation: Could rising yields hit stocks?
Trading Nation: Could rising yields hit stocks?

One thing the continued bull market run shouldn't have to worry about is the climate of rising interest rates, at least for a while.

If history is any guide, the move higher in yields that began in mid-July shouldn't start affecting equity values until the 10-year note roughly doubles from its current level, according to an analysis this week from broker-dealer LPL Financial.

What it comes down to is that at least early in a higher-rate environment, the walk-up in yields is interpreted as a healthy sign for an improving economy. The negative impact doesn't happen until more serious inflationary pressures kick in — somewhere around a 5 percent yield for a benchmark Treasury security that was trading around 2.47 percent Tuesday afternoon.

"With the low level of interest rates and inflation, the market is interpreting higher interest rates as a signal of improving growth expectations. We think this is the right interpretation, while the stock market's solid track record of performance in rising interest rate environments offers reassurance," wrote Burt White, LPL's chief investment officer, and Jeffrey Buchbinder, the firm's market strategist.

Government bond yields reached what some strategists believe could be a generational low on July 8 of 1.37 percent. Since then, the has gained about 7 percent. The index spent four months trading in a range before breaking out on Nov. 9 after the presidential election and amid hopes that looser fiscal policy will help bolster economic growth in the years ahead.

LPL's research looked at 23 periods of rising rates since December 1962, with an average duration of just more than a year and a median span of 0.7 year. The typical change in the 10-year yield was 227 basis points, or 2.27 percentage points, with a median of 149 basis points.

Keith Gillett | Corbis | Getty Images

The stock market gained 83 percent of the time, with an average rise of 9 percent and a median gain of 5.4 percent.

The worst periods were when the 10-year rose above 5 percent, primarily in the 1970s and early 1980s. One example during that period was from May 4, 1983, to May 30, 1984, a time when the S&P 500 lost 7.9 percent.

The last rising rate environment that saw a decline in stocks, however, came all the way back in the early 1990s. Yields rose from Oct. 15, 1993, to Nov. 7, 1994, with a corresponding stock market drop of 1.4 percent.

The worst time for the market with regard to yields came from Dec. 17, 1973, to Oct. 26, 1974, when the market fell 22.2 percent. A subsequent rise in rates from Dec. 19, 1974, to Sept. 16, 1975, saw the market gain 22.5 percent.

To be sure, using 5 percent as the benchmark is tricky, particularly in the current environment when yields are coming from such low levels. The historical average suggests that things could get tricky for the current market around 3.5 percent.

The LPL research "suggests that, with the 10-year yield currently near 2.5 percent and well below the 5 percent mark, rising bond yields may not disrupt the stock market's ascent," White and Buchbinder wrote. "So, while we would certainly not consider 5 percent a magic number, we do think yields have room to move before they become worrisome for the stock market."