Investors might be freaking out about higher interest rates, but Credit Suisse says the stock market is not

  • Rising interest rates may not be the culprit many investors think they are, according to Credit Suisse.
  • Strategists at Credit Suisse found rising bond yields did not hold back stocks this year, and the S&P 500 would have been up 16 percent on an annualized basis, based on its performance on days when bond yields rose this year.
  • The market could be more challenged when the 10-year yield gets to about the 3.5 percent level, but that does not mean stocks will sell off when they hit that level.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange (NYSE) in New York.

Higher interest rates might be scaring stock investors, but they haven't held back the stock market this year, according to a study by Credit Suisse Securities.

"Year-to-date, if you invested only on dates when interest rates went up, your annualized return would be 16 percent," said Jonathan Golub, chief U.S. equity strategist at Credit Suisse. Golub studied the correlation between the S&P 500 and the 10-year yield and found that for 2017, stocks gained 31.2 percent based just on the way they moved on days when bond yields rose.

"The argument that the market is selling off because of rising rates is mathematically wrong," he said.

Some analysts say a 10-year yield of 3 percent or even 3.5 percent could be a problem for the market. But Golub said stocks should respond positively to higher yields until they reach a level around 3.5 percent. Instead of acting as a barrier to stocks advancing, the 3.5 percent level is more of a neutral area, he said.

Golub studied the reaction of stocks to rising yields going back to 1991.

"When we get to 3 to 4 percent, the market will be indifferent to interest rates," he said. "It doesn't mean being at that level is a problem ... it means if rates continue to rise beyond that it becomes more challenging."

Stocks were weaker Tuesday morning, but the Nasdaq and the S&P 500 later turned positive on a tech-led rally. The Dow remained lower, pressured by a sharp drop in Walmart. Treasury yields were higher in afternoon trading, but the 10-year was off its highs, at 2.90 percent.

Source: Credit Suisse Securities

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