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Long-term rates have risen steadily since late last year and may continue to move higher. However, stocks typically perform well as rates rise.

S&P 500 typically performs well in rising rate environments chartLong-term interest rates have risen smartly since last fall, with the 10-year Treasury rate now hovering around 1.6% compared to lows of near 0.5% last summer. While long-term rates have stabilized over the past few weeks, further increases seem probable if the economy continues to reopen, growth expectations strengthen, and inflation picks up.

The rise in interest rates sparked some volatility in equity markets, particularly in growth-oriented sectors such as technology and communication services. In light of this, investors may be wondering what impact a continued rise in rates could have on their equity portfolios.

Over the past 25 years, periods of rising long-term interest rates have consistently coincided with periods of strong U.S. equity performance. Over that period, those rate increases correlated with improving growth expectations, which tend to correlate with improving corporate earnings, driving stock returns. It’s also important to remember that rates remain very low by historical standards, and an accommodative Fed is expected to hold short-term rates near zero for some time.

While a continued rise in rates may contribute to short-term bouts of market volatility, the same conditions that may push interest rates up should also contribute to stronger corporate revenue and earnings, which is generally a positive catalyst for equity performance.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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