The big story last week was interest rates, as yields on the 10-year government bond jumped to 3.23% (the highest level on long-term rates since May 2011). Two of the main reasons for this move were the September jobs data and the Federal Reserve, our nation’s central bank.
The unemployment rate dropped to a 48-year low of 3.7% and the economy added 134,000 jobs in September. While this was less than the 180,000 economists expected, job additions for the prior two months were revised higher by 87,000.
We also learned that wages rose 2.8% compared to the same time last year. This was inline with forecasts, and it suggests the strong job market is still not leading to higher wages yet.
This healthy jobs report will keep the Federal Reserve (Fed) on pace to hike short-term interest rates in December, and future hikes are the other main reason for the rise in long-term rates. Fed Chair Jerome Powell says he believes interest rates are still supportive of the economy and are a long way from slowing down the economy.
Wall Street is interpreting Chair Powell’s comments as the Fed having no intention of slowing down its short-term rate hikes. In fact, at its last meeting, the Fed indicated three short-term rate hikes are possible in 2019.
This week’s economic calendar is much lighter, but reports on inflation will be closely scrutinized for their potential impact on how quickly the Fed raises short-term interest rates. Historically, when inflation is high, the Fed tends to increase rates more quickly. Currently, inflation is neither too hot nor too cold.
The Simply Money Point
Rising interest rates haven’t historically been bad for the stock market. While short-term stock turbulence is common when rates move higher, stocks have historically performed well over the entire period that rates increased.
Our research at Simply Money Advisors has found that over the past 30 years, when interest rates on the 10-year government bond moved at least one percentage point, stocks had positive returns eight of the nine times. The reason for this is that higher rates tend to coincide with a strong economy and growing corporate profits.
Bonds may experience a move lower in price; however, higher rates present an opportunity to buy bonds that pay out more income. This may help offset any price losses that could occur from higher interest rates.