High Rates Don't Put the Brakes on Stocks
October 2023
Some clients have asked if stocks make sense in a world where short-term US Treasuries are yielding north of 5.5%. These investors can take solace in the historical evidence, which shows that interest rates have not been meaningful predictors of stock returns. In years with above average interest rates since 1955, during which the average 3-month Treasury yield was 6.7%, US stocks returned an average of about 12%. This is slightly higher than the average return in below-median interest rate years (11.6%), although the averages are statistically indistinguishable from each other.
Plotting annual US stock returns versus Treasury yields further emphasizes the lack of a meaningful relation between the two -- the level of interest rates is of little help in predicting stock returns. This is perhaps unsurprising when you consider interest rates are one of many factors reflected in how stocks are valued.
