There has been so much discussion since the mid-February high about how much growth stocks, and tech stocks, don't like higher interest rates. There is also a lot of chatter about how banks like higher rates.
I think about this often, because in my early years in the market, it was banks that liked lower rates. And I honestly can't recall folks ever having a narrative about whether growth stocks liked lower or higher interest rates.
With Good Friday falling on the first Friday of the month, I was reminded of the year 1994. The Fed hiked rates in early February, taking the market by surprise. That year, on Good Friday, my boss was on vacation and had all these short futures positions in stock indexes and I was annoyed, because I had to go into the office to manage them for him. So I thought this might be a good time to review 1994.
The first thing we can see is the massive rise in rates from that February hike (blue arrow). It's hard for many to remember, but interest rates really used to be much higher than they are now. The yield on the 10 year zipped right up from 5.6% to 7.1% in two months, without so much as a breather.
Prior to August 1994 I used the NYSE Financial Index to track banks (there were no ETFs then) but in August they created the Bank Index. So let's use the chart of JP Morgan (JPM) as a proxy for the banks back then. Oh look, the banks did not like that rate hike as it promptly fell 15% in a month.
As bonds leveled out in the spring of that year and interest rates sat in that 7.20% range JPM managed a nice rally, even beyond the February high.
Rates did not start ticking higher again until September. But by then JPM was already down 15% from that summer high. Not exactly a correlation you can hang your hat on is it?
So what did the S&P do? It fell just like the banks, but similar to JPM it bottomed in April. You see that low at 435 on the S&P in early April? Well, this is the cash, not the futures chart, but I covered my boss' shorts in the S&P futures (and the OEX, for old timers!) on that fateful Good Friday.
I had him on one phone telling me what to do (from vacation) and the S&P futures guys on the other placing orders. Being a stock girl, my positions, all stocks, did not trade that day as bonds went down the limit. (As an aside, if you don't think the internet has made things easier, this is proof it has.)
Putting all that aside, 1994 turned out to be one giant sideways after that initial spill. We had a lot of up and down. It was actually a fun trading year, not a fun investing year.
But what about Nasdaq? Would you look at that: Nasdaq barely blinked after that rate hike in February. In March it went on to make a higher high. It wasn't until late March that it played catch up as it tumbled 10% in just over a week. Now notice that Nasdaq didn't bottom until June, nearly three months after the S&P did.
But step back and look at all of these charts, from a rising rate environment. It didn't collapse any particular group. In fact it simply created a lot of up and down and a good trading environment.
I am certain someone will have a list of fundamental reasons why this is different now or why rates matter more to one group now vs. another. There are always a list of reasons. But here is one example where higher interest rates created a trading environment, not a one direction market. That's my takeaway.