Volatility has returned but shouldn’t be feared: How stocks can rise with interest rates

U.S. stocks have posted positive average monthly returns during periods of rising 10-year yields, up until six per centPATRICIA DE MELO MOREIRA/AFP

If you forgot what it was like to invest in an environment with high volatility, February reminded you. Whereas there were just eight days in 2017 that the S&P 500 moved more than one per cent in either direction, there have been 12 of those days so far in 2018, and 10 of them occurred in February.

Many market participants have occupied their time trying to determine what caused the heightened volatility and sharp pullback in equities, pointing the blame at volatility-linked investment products and worries that the Federal Reserve will accelerate the pace of interest rate hikes. The 10-year U.S. Treasury bond also climbed to 2.84 per cent for the first time since early 2014, and data showed annual wage growth of 2.9 per cent in January, demonstrating that not only is economic growth improving, but higher inflation may also be on the horizon.

“The real struggle the market is grappling with is how to invest in a period of increased growth as we exit a sustained period of low growth since emerging from the Great Recession,” said Lindsey Bell, investment strategist at CFRA Research. “Higher interest rates and higher levels of inflation are normal in an improving economy, but the speed at which those rates increase needs to be steady and not swift.”