Key Points

  • 2021 seems to be more of a “bunny” market with the stock market hopping up and down.

  • In our view, market jitters over the impact of rising interest rates on economic activity seem to be premature.

  • Business investment appears strong with capital spending indicators remaining robust and strategic corporate M&A deals multiplying like bunnies in the first quarter even as rates have climbed.

This probably isn’t the start of a bear market, but it may feel like less a bull market compared with last year’s charge. The progress on vaccinations and re-openings coupled with the rise in interest rates and worries over the potential withdrawal of central bank stimulus next year has led this to be more like a “bunny” market, with the stock market hopping up and down.

A “bunny” market?

Source: Charles Schwab, Bloomberg data as of 3/12/2021.

Pulling a rabbit out of a hat

An increase in interest rates tends to raise the cost of borrowing, which in theory discourages business investment in equipment, capacity, and employment. This contraction in capital spending can slow growth in the economy, earnings and jobs. In practice, the relationship between business investment and interest rates is more ambiguous. Often, rising demand can accompany rising interest rates, compelling businesses to expand despite the higher costs. Recent data seems to be following this latter scenario.