- Higher for longer interest rates won't derail the bull market in stocks, according to BMO's Brian Belski.
- Belski highlighted that stocks have performed just fine during elevated interest rate periods based on market history.
- "S&P 500 has had better risk adjusted returns during periods of higher interest rates," Belski said.
A period of higher for longer interest rates isn't enough to derail the current bull market in stocks, according to a Wednesday note from BMO's chief investment strategist Brian Belski.
Belski observed that based on historical analysis of data going back to 1979, the stock market performs just fine during periods of elevated interest rates.
High interest rates are "understandably uncomfortable for some investors," because since 2009, interest rates have been at historically low levels, until last year when the Federal Reserve started to aggressively hike rates in its bid to tame inflation.
An entire generation of investors grew up during an extreme period of near-zero interest rates.
But high interest rates aren't all that bad for the stock market over time.
"We have found that returns tend to be slightly below average and interestingly a bit less volatile compared to lower interest rate levels," Belski said. "The S&P 500 has had better risk adjusted returns during periods of higher interest rates."
Belski found that on a one-year rolling basis, the S&P 500 gained an average 8.2% during high interest rate periods, compared to 10.6% during low interest rate periods. But with those higher returns came significantly higher risk, with a standard deviation of 18% compared to just 12.7% during periods of high interest rates.
Standard deviation helps investors measure the amount of risk they are taking on relative to the average gains they can expect when buying a security.
As to what works well during periods of higher interest rates, Belski highlighted cyclical sectors like technology, energy, and industrials. Meanwhile, more defensive sectors underperformed the market, like utilities and health care.
"This makes sense to us since rising interest rates are usually an indication of stronger economic growth as the bond market readjusts levels in order to avoid inflation," Belski said.
The broader US economy is indeed still growing and on a solid foundation with unemployment near historically low levels. The Atlanta Fed's GDPNow model suggests the US economy is on track to grow about 5% in the third-quarter.