Many financiers are worried about the long-term maintenance of a high key rate. However, their opponents believe that a high rate does not always mean disaster for the stock market.
In 2023, two important events happened simultaneously in the United States. This refers to a rise in bond yields and a slump in the stock market. Such changes could be mainly explained by high interest rates.
Brian Belski, chief investment strategist and leader of the Investment Strategy Group at BMO, estimates that the S&P 500 index delivered an average annual return of 7.7%. This figure came at a time when 10-year Treasury bond yields were below 4%. Meanwhile, when 10-year bonds yielded 6% or higher, the average annualized return of the index reached 14.5%. Despite the Fed's interest rate hike, the stock market continued to rise. At the same time, many analysts believe that tight monetary policy is not always harmful to the market. According to calculations, when interest rates are high (above 0-1% or 0-2%), stocks usually climb. That is why the stock market may grow by the end of the year.
The situation has somewhat stabilized this year. Since early April, 10-year bond yields have jumped by 40 basis points to 4.58%. It is currently hovering near its peak, seen in November 2023. As for the S&P 500 index, it has fallen by more than 4%. Experts attribute this decline to high inflation and recent macroeconomic reports that disappointed investors. Notably, market participants were counting on a speedy reduction in the Fed rate, but it did not happen. The decision on this issue was revised in favor of two rate cuts in 2024. Earlier, analysts and traders anticipated seven cuts in the Fed's key rate.
