Forecasting Stocks In 2022? Watch The Fed

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Investors know that the bond market matters to stock prices. Recent research shows how important this is. If the US raises rates materially in 2022, especially at a faster rate than other countries, the impact on the stock market is unlikely to be positive.

stocks and bonds

Adam Zaremba of the Montpelier Business School and his colleagues have looked at the relationship between yield curves and stock returns in several countries., Specifically, they examine changes in yields in 10-year government bonds. the title of his paper is Yield Curve Shifts and Cross-Section of Global Equity Returns, It examines sixty countries from 1921 to 2020.

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They find that countries with the most growth in bond yields tend to have weaker stock price performance. Specifically, the countries with the highest quintile rate growth their stock markets outperform those countries in the lowest quintile by 0.76% per month. This suggests that, all else equal, investing in countries that are increasing interest rates at a relatively fast rate is best avoided by stock investors.

fed hikes

The Fed has indicated it could raise rates three times in 2022 and the bond market broadly agrees with that view. US rates are rising somewhat by most estimates.

This does not bode well for the stock market, although the metric to watch for according to research is a change in the yield on 10-year government bonds rather than a specific number of rate increases, and importantly how this change compares with other countries. Is .

example of turkey

Turkey gives an extreme example of this relationship in 2021. Yields on 10-year Turkish government bonds have risen from around 13% to 25% in 2021 and Turkey is one of the worst-performing stock markets for 2021. It also offers some hope that the US, even though yields may rise, is unlikely to be as extreme as some other countries.

However, there is no shortage of research showing that rising rates are often negative for the stock market. If the Fed sticks to its plan to raise rates in 2022, it could prove to be a drag on stock returns.


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