By Kevin Ervin via Iris.xyz
The past month has contained some of the highest levels of stock market volatility of the past few years. While this can be somewhat unnerving, this is not an entirely bad situation for investors. Please read below to learn about some of the hidden benefits of recent stock market declines.
RISING INTEREST RATES
The primary cause most often cited as the reason for the decline in the stock market earlier in February was rising interest rates. There have been times in history where rising interest rates have caused some significant subsequent negative returns for the stock markets. Investors have not forgotten about these periods. However, when one looks more closely at the association between rising interest rates and subsequent stock market returns, the periods of negative stock market returns resulted when the 10-year US Treasury yield was above 4% at the beginning of the measurement period.
From the below graph, you can see that since 1963 that stock market returns have been positive over subsequent 2-year periods when 10-year Treasury yields are rising, when interest rates are rising from a low starting point. This fact pattern is generally indicative of a growing economy, rather than runaway inflation concerns, which would tend to be the case if interest rates were rising from an already elevated level.
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