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When rates move up this fast, the stock market tends to struggle

CNBC logo CNBC 4/23/2018 John Melloy

a man riding a motorcycle down a dirt road© Provided by CNBC Stock investors fretting about the 10-year Treasury yield's march higher to 3 percent are worrying with good reason.

History shows when the benchmark rate for everything in the economy from corporate bond yields to mortgage rates moves by this much, this fast, the stock market struggles in the following months.

The yield on the 10-year has gone from a low at the start of January of 2.40 percent to within a whisker of 3 percent on Monday. That's a move of 60 basis points (1 basis point equals 0.01 percentage point) in less than 5 months.

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A move near that speed and magnitude has only occurred 15 times in the last 20 years, according to CNBC analysis using Kensho, a data tool used by hedge funds.

Here's what happens to the stock market and key sectors in the next five months after such a move:

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Five months after a rate spike like this, the S&P 500 is in the red more than 70 percent of the time, according to Kensho. (The average pullback is just 0.3 percent. That's not much, but for a market basically little changed on the year, this data is not promising.)

Notice the kind of stocks that decline. Materials and bank sectors, two of the biggest beneficiaries of higher rates on the way up, tend to lead to the downside. Consumer staples, slow-moving companies with fat dividends, tend to gain.

Going by this data it seems the market tends to struggle as these higher rates make their way through the economy.

To be sure, some investors have said this time will be different because we are rising off such a low rate. A 3 percent yield is still very low relative to history and so companies and consumers will be just fine, they argue.

But for an economic expansion and bull market (see share buybacks funded by cheap debt) fueled by low rates, one could argue a move this quickly will wreak even more havoc this time.


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