What Do Rising Interest Rates Imply For Stocks, REITs And Gold?

The world is still battling a pandemic, the US government is in turmoil and there’s no shortage of other events lurking on the global stage that could cause trouble for asset markets. Should we add in rising interest rates to the list of worries?

“Markets are now definitely pricing in rate hikes by the second half of 2023, but the time frame is a long way away and it will keep shifting, especially if the US continues to lose jobs as they did in December,” says Kenneth Broux, a strategist at Societe Generale in London.

The future is still uncertain, but rates are clearly rising, albeit from an unusually low base. It’s unclear if the rise is one more in a line of temporary upside runs in an otherwise secular decline. Analysts have been predicting the end of the slide in yields for several decades and they’ve been wrong every time. Is this time different? Maybe, but the jury’s still out and it’ll take several months at the least to develop convincing evidence to the contrary.

Meantime, let’s take a quick look at the relationship between the benchmark 10-year Treasury yield vs. benchmarks for three asset classes that tend to figure prominently in asset allocation strategies: US stocks, US real estate investment trusts (REITs), and gold. The other broad-brush measure of conventional asset classes (bonds) needs no analysis since rising rates, by definition, translate to falling prices for fixed-income securities.

Let’s begin by looking at the recent trend in the 10-year rate. As the chart below shows, there’s been a clear upside break in recent months. The rise to 1.15% yesterday (Jan. 11) marks the highest level since last March. The increase in the rate’s 50-day moving average above the 200-day average late last year suggests that a strong upside bias will persist for the near term.

Now we turn to the relationship between stocks and the 10-year rate. There are many ways to model this relationship and what follows is barely dipping our statistical toes into the ocean of possibility. But every analytical journey has to start somewhere, and as a quick look into the relationship, it’s reasonable to ask: How do one-year rolling changes compare?

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Disclosure: None.

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