Stocks slumped this week, with the S&P 500 index falling about 0.7%, the Nasdaq Composite slipping 0.5%, and the Dow Jones Industrial Average sinking 1.4% as a Federal Reserve interest-rate hike looks increasingly likely. But what if that hike kicks off the next leg of the bull market?
The market-implied odds of a hike have risen dramatically, from 59% a week ago to 87% on Friday, per the CME FedWatch tool. That makes sense given that inflation reports this week show prices continuing to outrun the Fed’s 2% target. And with oil rising another 9% this week, the inflation pressure doesn’t seem to be abating anytime soon. Mix in the strong August jobs report we got the prior week, and the case for a rate hike seems clear.
But how much would a quarter-point hike actually matter? Rates have already been climbing, with the 10-year Treasury yield zooming from 4.4% at the end of June to nearly 5% today, and the two-year yield rising by about the same amount. On Thursday, the 30-year yield settled at 5.36%, its highest level since June 2004. Put another way, the last time long-term yields were this high, America had not yet seen Will Ferrell ask, “I’m Ron Burgundy?”
This spike certainly hasn’t been helpful for the stock market, which is about flat since June even as analysts have ramped up earnings expectations for 21 straight weeks. But it hasn’t been catastrophic, either.
“Concerns over rates destabilizing equities are real, but tech euphoria creates a high bar for macro risks,” writes Benjamin Bowler, head of global equity derivatives research at Bank of America. In other words, excitement over artificial-intelligence is such a big driver that investors are shrugging off the rate rise. Bowler points out that this happened in the late 1990s as well, when the 30-year yield rose 2% and the Fed hiked by more than 1%, as the Nasdaq partied hard.