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Should a rising 10-year yield scare you out of stocks?

Brian Sozzi
·2-min read

The slow melt-up in the 10-year yield fueled by inflation fears that has spooked some bulls out of stocks in recent weeks isn't that big a deal, contends BMO Capital Markets Chief Investment Strategist Brian Belski.

"The economy is recovering because earnings are going up, the fundamentals are improving so of course, interest rates are going to go up," Belski said on Yahoo Finance Live.

Belski has some compelling historical data to back up his view.

The S&P 500 has posted an average price return of 14.2% during periods of rising interest rates compared to a mere 6.4% average gain in periods of falling rates, Belski's research dating back to 1990 shows. In seven interest rate cycles Belski identified since 1990 in which yields rose for "prolonged" periods, the S&P 500 has had an average annualized price gain of about 15%.

"From our perspective, rising interest rates can mean that the bond market is correctly anticipating future economic growth and staying ahead of inflation — things that typically benefit stock prices," Belski says. "A closer inspection of the data reveals that investors should welcome, not loathe, higher interest rates if history is any sort of guide."

Suffice it to say, Belski is in the minority at the moment.

The yield on the 10-year Treasury has gone from about 1.07% on Feb. 1 to 1.47% presently. Investors have reasoned that with a strong economic recovery later this year as more people get the COVID-19 vaccine, inflation will return. In turn, that will spur the Fed to raise interest rates faster than expected and then depress stock prices.

Investors have used the move higher in yields to lighten their load on risk assets.

Since Feb. 15 — when the climb in yields caught added steam — the Dow Jones Industrial Average has dropped slightly while the S&P 500 has fallen 2.5%.

Selling pressure has been the most acute on the Nasdaq Composite, which is down 7.5% since Feb. 15, as investors model in lower returns for hot tech stocks amid the rise in rates. Some notable former high-flying tech stocks that have turned into laggards since Feb. 15 include Salesforce (-11%), Zoom Communications (-8.3%) and Nvidia (-8%).

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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