This logic would also extend to further rate increases. If rates for the 10-year Treasury notes go to 2.5%, they would be within the central range over the pre-pandemic years. It is only when rates begin to rise above 3% for a sustained period, not briefly, that the prospects of significant economic damage will start to get material. The years from 2013 to 2019 show that the economy and the markets can do quite well with rates between 2 and 3%.
An Overdue Return To Normal
That’s not to say there are no consequences or risks, of course. Growth stocks are showing the strain, and this has had a disproportionate impact on the market. The housing sector might slow down as mortgage rates increase, but again this trend would be an adjustment, not a wholesale change. The economy and markets can and do adjust to changes in interest rates. This environment is a normal part of the cycle and one we see on a regular basis. The current trend is perhaps a bit faster than we’ve been seeing, but it is a response to real economic factors—and, therefore, normal in context.
That is why there is no need to panic. The rate increases are a necessary adjustment as we return to normal. They have certainly generated turbulence in markets in recent days, and we might well get more turbulence before this scenario is over. Market turbulence, however, is normal as well. It’s not necessarily a sign of a larger problem.
Keep calm and carry on. The current rate cycle is a needed—and overdue—return to normal.
Brad McMillan is the chief investment officer at Commonwealth Financial Network.