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Interest Rates & War: What Does Historical Precedent Tell Us?
The two most significant topics on investors’ minds are interest rates and geopolitical escalations. For each of these topics, investors must understand that markets tend to act counterintuitively to each of these market factors. Using historical data and other market factors, I break down each in a historical context below.
Interest Rates
Higher Interest Rates Can Help the Consumer
High interest rates have a terrible reputation for the stock market, but they can also help the U.S consumer. For the past year or so, Americans have been piling into money market accounts, and their balances are near all-time highs. Though interest payments have spiked, they are counterbalanced by a leap in interest income in money market accounts.
Are Rate Cuts Really that Bullish?
Savvy investors understand that bull markets are built on liquidity. Because the U.S. Federal Reserve and Jerome Powell control the most liquidity, investors understandably key into every FOMC meeting. Nevertheless, the irony is that historical data shows that markets like discounting future rate cuts ahead of time and tend to like the idea of a rate cut more than the rate cut itself. The table below shows the market’s performance after the first rate cut. Six-month returns are mediocre at best, with the S&P 500 lower six months later after a rate cut 4 of 9 times with an abysmal return of just 3.4%.
Meanwhile, a look at how the market has acted in the face of a “hawkish” Fed is the perfect example of why common thinking about monetary policy is misled.
Rates & The Economy
Though inflation is a factor in delaying rate cuts, it can also mean that the Fed believes that the economy is strong and does not require any accommodative Fed policy. For example, personal consumption expenditures (comprising nearly 70% of GDP) recently notched a record high while GDP has trended higher since dipping during the brutal bear market of 2022.
Geopolitical Escalations in the Middle East
After months of depressed volatility, stocks are in a classic “headline-driven” environment due to escalations in the Middle East. Though telegraphed, Iran fired a barrage of missiles and unmanned drones at Israel over the weekend. Fortunately for Israel, the “Iron Dome” blocked around 99% of the offensive, and few injuries were reported.
Despite the lack of impact, the news is significant. Iran has conducted attacks for years through proxies. However, now that Iran has directly attacked Israel, it is a clear escalation in the conflict between the two countries. The conflict is likely to get worse before it gets better – the Israeli Air Force has reportedly completed its preparation for an imminent attack against Iran.
Short-Term Bearish, Long-Term Bullish
Like interest rates, Wall Street’s interpretation of war and stocks and the historical reality of it often differ. History tells us that geopolitical escalations tend to cause an initial shock lower in equities but later provide an opportunity in the intermediate to long term.
Beyond historical data, investors should look at defense stocks such as Raytheon and Northrop Grumman for clues.On the interest rate side, investors can track the Gold ETF and Silver ETF as well as the interest rate-sensitive Russell 2000 Index.
Bottom Line
Investors who study historical precedent may be surprised with their findings regarding the relationship between, interest rates, war, and stocks. Rate cuts are not necessarily bullish, and war is not necessarily bearish.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Investment Ideas feature highlights: Raytheon, Northrop Grumman, Gold ETF, Silver ETF and Russell 2000
For Immediate Release
Chicago, IL – April 17, 2024 – Today, Zacks Investment Ideas feature highlights Raytheon (RTX - Free Report) , Northrop Grumman (NOC - Free Report) , Gold ETF (GLD - Free Report) , Silver ETF (SLV - Free Report) and Russell 2000 Index (IWM - Free Report) .
Interest Rates & War: What Does Historical Precedent Tell Us?
The two most significant topics on investors’ minds are interest rates and geopolitical escalations. For each of these topics, investors must understand that markets tend to act counterintuitively to each of these market factors. Using historical data and other market factors, I break down each in a historical context below.
Interest Rates
Higher Interest Rates Can Help the Consumer
High interest rates have a terrible reputation for the stock market, but they can also help the U.S consumer. For the past year or so, Americans have been piling into money market accounts, and their balances are near all-time highs. Though interest payments have spiked, they are counterbalanced by a leap in interest income in money market accounts.
Are Rate Cuts Really that Bullish?
Savvy investors understand that bull markets are built on liquidity. Because the U.S. Federal Reserve and Jerome Powell control the most liquidity, investors understandably key into every FOMC meeting. Nevertheless, the irony is that historical data shows that markets like discounting future rate cuts ahead of time and tend to like the idea of a rate cut more than the rate cut itself. The table below shows the market’s performance after the first rate cut. Six-month returns are mediocre at best, with the S&P 500 lower six months later after a rate cut 4 of 9 times with an abysmal return of just 3.4%.
Meanwhile, a look at how the market has acted in the face of a “hawkish” Fed is the perfect example of why common thinking about monetary policy is misled.
Rates & The Economy
Though inflation is a factor in delaying rate cuts, it can also mean that the Fed believes that the economy is strong and does not require any accommodative Fed policy. For example, personal consumption expenditures (comprising nearly 70% of GDP) recently notched a record high while GDP has trended higher since dipping during the brutal bear market of 2022.
Geopolitical Escalations in the Middle East
After months of depressed volatility, stocks are in a classic “headline-driven” environment due to escalations in the Middle East. Though telegraphed, Iran fired a barrage of missiles and unmanned drones at Israel over the weekend. Fortunately for Israel, the “Iron Dome” blocked around 99% of the offensive, and few injuries were reported.
Despite the lack of impact, the news is significant. Iran has conducted attacks for years through proxies. However, now that Iran has directly attacked Israel, it is a clear escalation in the conflict between the two countries. The conflict is likely to get worse before it gets better – the Israeli Air Force has reportedly completed its preparation for an imminent attack against Iran.
Short-Term Bearish, Long-Term Bullish
Like interest rates, Wall Street’s interpretation of war and stocks and the historical reality of it often differ. History tells us that geopolitical escalations tend to cause an initial shock lower in equities but later provide an opportunity in the intermediate to long term.
Beyond historical data, investors should look at defense stocks such as Raytheon and Northrop Grumman for clues.On the interest rate side, investors can track the Gold ETF and Silver ETF as well as the interest rate-sensitive Russell 2000 Index.
Bottom Line
Investors who study historical precedent may be surprised with their findings regarding the relationship between, interest rates, war, and stocks. Rate cuts are not necessarily bullish, and war is not necessarily bearish.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.