bear market

Rising rates won't end the stock market party

July 11, 2013: 10:29 AM ET

A historical look at periods when the 10-year Treasury yield spiked significantly should ease stock investors' worries.

Stock market tickerFORTUNE – Interest rates are expected to soar further, but don't expect that to ruin the bull market in U.S. stocks.

The yield on the 10-year U.S. Treasury note has risen sharply since May when the U.S. Federal Reserve hinted it may cut back on $85 billion in monthly bond purchases, a policy that's driven down borrowing costs while sending stocks to record highs.

Before slipping slightly Thursday to 2.59%, the 10-year reached close to a two-year high last week, causing some to wonder if equities are in for a correction as the days of easy money could come to an end.

That could happen, but history has shown it probably won't.

The fact that yields have risen on the likelihood that the Fed may wind down its assets purchases later this year isn't anything new: Over the past 30 years, whenever the central bank's easing cycles come to a close, yields on the 10-year note rose an average of more than 50 basis points, according to David Rosenberg, economist at Gluskin Sheff. In a note to clients Wednesday, he pointed out that jumps of 100 basis points or more (as the market has seen of late) are not unusual either.

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All this reflects an improving economy, rather than jittery investors.

"It's not more complicated than that," Rosenberg notes. If the past 40-plus years say anything about the U.S. bond market, higher interest rates aren't likely to end the bull market in stocks.

The caveat, however, is the growth of corporate earnings, which many analysts expect to slow down considerably during the second quarter. Depending if that happens and how U.S. companies do in the coming quarters, the stock market is still vulnerable. With less support from the Fed, investors have more reason to dissect the bottom line of companies.

Nonetheless, stocks have withstood higher interest rates. During the nine periods since 1962 when the 10-year note yield rose at least two percentage points higher, the S&P 500 posted average annual gains of 10.8%, Rosenberg notes, citing Birinyi Research. And during the past 17 times the 10-year rose more than 1 percentage point, the market a year later was higher 70% of the time.

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On Wednesday, the Fed left investors guessing when minutes released at its June meeting suggested officials were split over when to end its stimulus program, quantitative easing. Afterward, Fed Chairman Ben Bernanke reassured investors that the days of loose U.S. monetary policy aren't over; the central bank, he said, will likely keep short-term interest rates close to zero even as it prepares to wind down monthly purchases of Treasuries and mortgage-backed securities.

Investors welcomed the news; stocks aimed for record territory in the final hours of trading Thursday.

So if the bull market comes to a halt, don't blame the bond market.

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