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What Rising Rates Mean for the Stock Market

By Dan Caplinger – Updated Oct 8, 2021 at 4:13PM

Key Points

  • Stock markets were slightly lower Friday afternoon.
  • Interest rates continued to rise.
  • Recent bond market moves could have impacts on certain stocks.

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There's no one-size-fits-all answer.

The stock market has kept investors on their toes lately, and Friday was no exception. After spending much of the morning in positive territory, most major market benchmarks pulled back in early afternoon trading. As of 12:30 p.m. EDT, the Dow Jones Industrial Average (^DJI -0.85%) was down 6 points to 34,749. The S&P 500 (^GSPC -0.19%) had fallen 2 points to 4,397, and the Nasdaq Composite (^IXIC -0.02%) gave up 48 points to 14,606.

Making bigger moves on Friday was the bond market. Interest rates continued to move higher as Treasury bond prices fell, and many investors are looking for the upward trend to persist. Below, we'll look more closely at what's happening in the bond market and whether stock investors have cause for concern -- or can jump on potential opportunities.

Old security with word Bond highlighted.

Image source: Getty Images.

Incremental moves for interest rates

Movements in the bond market tend to be quite small. Nevertheless, they can pack a huge impact.

For instance, on Friday, the yield on the 10-year Treasury bond was up just three-hundredths of a percentage point. However, that put the yield above the 1.60% mark for the first time in four months, reversing a summer bond-market rally that sent yields below 1.20% briefly.

Other bonds saw similar moves. Yields on 30-year Treasuries climbed four-hundredths of a percentage point to 2.17%. Five-year Treasury bonds got a three-hundredths of a percentage point bump to 1.05%, reaching their highest level since early 2020.

Meanwhile, at the very shortest end of the yield curve, interest rates remained at rock-bottom levels. Three-month, six-month, and 12-month Treasury bills all yielded less than 0.10%.

As small as the daily moves were, they have been adding up as investors prepare for the next stage of monetary policy management from the Federal Reserve. Over the past year, the 10-year Treasury yield has more than doubled, and the five-year yield has more than tripled.

Perhaps the biggest surprise is that bond yields moved higher even after some bad news on the economic front. The Bureau of Labor Statistics released its latest employment numbers, and the U.S. economy produced only 194,000 nonfarm jobs during the month of September. That was far below the 500,000 new jobs that most economists had expected, and although the unemployment rate fell by four-tenths of a percentage point to 4.8%, levels of unemployment remain above where they were prior to the beginning of the pandemic.

Where stocks are getting some help

Higher interest rates raise concerns about hampering economic activity, but they're still good for some sectors. In banking, the combination of higher long-term rates and sustained low short-term rates widens net interest margins on lending, and that's generally good news for profits.

It's therefore not surprising to see major bank stocks continue to pick up ground. Morgan Stanley (MS -0.17%) had the biggest gains, rising more than 1%, but more-modest increases were visible for big consumer banks like Bank of America (BAC -2.68%), JPMorgan Chase (JPM -1.58%), and Wells Fargo (WFC -2.12%).

Nevertheless, higher rates have also been blamed for poor performance among tech stocks lately. Start-ups need access to cheap capital, and they also need time to generate profits far into the future. Higher rates mean that those future earnings are discounted, weighing on share prices.

It's important to keep in mind that even with recent gains, interest rates are still at historically low levels. Yet many investors focus more on trends, and it's entirely possible that rates could push quite a bit higher in the future.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Dan Caplinger owns shares of JPMorgan Chase. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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