Two the Point — Are Interest Rates About to Peak?

Market Insights in Two Minutes — Interest rates impact all our daily lives – mortgage rates, credit card rates, and what we can earn on our bank deposits.  Interest rates also influence the pace of economic growth, corporate earnings, and leadership in the stock market.

As interest rates rise, bank stocks often outperform.  Lately, we have witnessed a sharp divergence from this typical relationship.  What might this mean?

Taken in combination with very lopsided sentiment (everyone thinks rates will continue higher), we believe this unusual performance pattern is a reason to entertain the idea that interest rates may soon peak for this economic cycle.  Bank stocks often peak relative to the market prior to a top in rates, and yield curve inversions like the one we have just seen often indicate lower rates 12-months later. 

Implications of a cyclical peak in interest rates would include support for the housing market, better performance from Growth stocks, and rising bond prices.

Bank Stock Performance Relative to the S&P 500 vs. 10 Year US Treasury Yields
Sources: Strategas Research Partners; Bryn Mawr Trust; FactSet, Inc.

More from TWO THE POINT