- Rising interest rates have sparked a surge in stock-market volatility that’s seen tech shares take a sharp dive.
- But investors should not fear rising interest rates, according to a recent client note from The Leuthold Group.
- “Yields may be rising, but yield pressure is still extremely low because real growth is improving even faster,” said Jim Paulsen, the firm’s chief investment strategist.
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A spike in interest rates since the start of the year has accelerated a rotation out of high-growth technology stocks and into value stocks poised to benefit from a reopening of the economy.
The Nasdaq has fallen more than 10% over the past month as the Dow has soared to record highs, with a spike in the 10-year US Treasury yield acting as the main catalyst. It recently surged to a cycle high of more than 1.60% after starting the year below 1%.
But according to Jim Paulsen, the Leuthold Group’s chief investment strategist, rising interest rates do not represent a long-term threat to the stock market. Paulsen expects the 10-year yield to cross 2% by the end of the year.
A spike in interest rates and its impact on the stock market depends on the economic backdrop, according to Paulsen. Rising interest rates amid a strengthening economy “may prove no challenge at all for stocks,” Paulsen said.
Since 1950, the S&P 500 achieved an average annualized price return of 9% during quarter when interest rates were on the rise, according to the note. “The effect of rising-yield quarters is probably not that much worse because real economic growth also improved for many of these quarters,” Paulsen explained.
With COVID-19 subsiding and the full reopening of the economy imminent, economists are expecting 2021 GDP growth to surge to 5.5%. This represents a favorable backdrop for the stock market even if interest rates continue their ascent.
If the pace of economic growth slows in 2022, the stock market will become much more sensitive to rising interest rates.
But for now, “with the economy enjoying a post-pandemic boom, rising yields may prove far less damaging for stock investors in 2021,” Paulsen concluded.
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