Technology leads stock decline, Nvidia down nearly 4%

Rising bond yields have been a major catalyst for equity withdrawals over the past year.

But with the market shifting to expect interest rates to remain higher than the previous decade for longer than many initially hoped, Brian Belsky, chief investment strategist at BMO, points out that high rates haven't always been a bad environment for stocks.

In an analysis dating back to 1990, Belsky found that the S&P 500 monthly return actually achieved its best average annual returns when the 10-year Treasury yield (^TNX) was higher.

Belsky's work shows that the benchmark achieved an average annual return of 7.7% in months when the 10-year Treasury yield was less than 4%, compared with an average annual return of 14.5% in months when the 10-year Treasury yield was years 6%.

“In a high interest rate environment, certainly above 0%-1% or 0%-2%, stocks typically do very well,” Belsky said. “So I think we're recalibrating that. We still believe that from these levels inventories are higher at the end of the year.”

Belsky's research shows that on average, stocks performed better in a high-ratio environment than in a low-ratio environment. The average one-year rolling annual return for the S&P 500 during a low-rate environment is 6.5%, while it is 13.9% in a high-rate regime.

He said this makes sense given that one of the reasons the Fed keeps or lowers interest rates is sluggish economic growth expectations. Given the current backdrop in which the Fed feels the economy is in a strong position to handle higher borrowing costs, an interest rate increase may not be so bad for stocks, Belsky said.

“If we can hover between the 4% and 5% range [on the 10-year Treasury yield] “And we still have strong hiring, but more importantly, we have very strong earnings and, by the way, cash flow, I think the market can do very well.”