Should rising interest rates worry investors?

Stocks shoot up at Tuesday's open, but bond yields move higher and trim gains substantially.

By Charley Blaine May 28, 2013 7:05PM
© Adam Gault, OJO Images, Getty ImagesThe question for Wednesday: Is the fading of what had been a killer rally on Tuesday a cause for concern?  If you think rising interest rates are an issue, then the answer may be yes.

The major averages hit new intraday highs early in the day, thanks to good housing and consumer confidence numbers. The Dow Jones industrials ($INDU) jumped as many as 218 points, with the Standard & Poor's 500 Index ($INX) up nearly 25 points. The Nasdaq Composite Index's ($COMPX) had climbed as many nearly 56 points.

But starting around 10:25 a.m. ET, the averages started to fade and slowly but surely gave up roughly half their gains by the close.

The Dow closed up 106 points to a record 15,409. The S&P 500 added 10 points to 1,660. The Nasdaq was up 30 points to 3,489. The S&P 500's close, however, was its best close only since May 21 as well as its fourth-highest close ever, and the Nasdaq also had its best close in a week.

The Dow finished higher for a 20th straight Tuesday. The S&P 500 and Nasdaq have risen for 10 straight Tuesdays.
The rally was triggered by other rallies, in Asia and Europe -- and then by a report showing home prices in March were up more than 10% from a year ago. Gains were largest in Phoenix, Las Vegas and San Francisco. But prices nationally were only back to 2003 levels, the S&P/Case-Shiller report said.

In addition, consumer confidence hit its highest level since February 2008, the Conference Board said.

All that said, the question is why were those big early gains were cut in half.

Obviously, interest rates were an issue. The 10-year Treasury yield hit 2.135% Tuesday afternoon, up from 2.011% on Friday and 1.63% on May 2. The 30-year Treasury yield climbed to 3.29% from Friday's 3.175%.

The Dow Jones Utility Average ($UTIL), which moves against to interest rates, fell 6.8 points to 492. The index is down 8.4% this month while the Dow Industrials, the S&P 500 and the Nasdaq are up 3.8%, 3.9% and 4.8%, respectively.

Investors have been fretting for weeks about when the Federal Reserve might start to taper down their big bond purchases, and the assumption is that rates will move higher when that happens. High rates will knock down bond prices.

There's a larger fear afoot, however, about when the Fed will actually raise rates. The consensus is not until 2014 at the earliest.

Still with everyone talking about interest rates, days with sizable gains followed by declines may occur fairly regularly, said Peter Tuz, president of Chase Investment Counsel of Charlottesville, Va.

There's also the worry that stocks look pricey. The major averages are up nearly 23% since Nov. 15, with almost no break, and all are trading 11% to 12% above their 200-day moving averages, which also suggests overconfidence.

Helping to give stocks support are the huge buybacks companies are announcing, but even this has a weakness. So far this year, big U.S. companies have given the go-ahead for $286 billion of buybacks, up 88% from a year ago, according to financial market research firm Birinyi Associates.

S&P 500 companies reported earnings of $98.30 in the first quarter of 2013, up $94.60 in the third quarter of 2011. JPMorgan Chase analysts believe that 60% of that gain -- $2.20 a share -- is due to buybacks  taking hundreds of millions of shares off the market.

The risk going forward is that companies will spend too much buying in shares and the companies' growth won't be as fast.

For the record, 25 of the 30 Dow industrial stocks were higher on Tuesday, led by Microsoft (MSFT), UnitedHealth Group (UNH) and Walt Disney (DIS). The laggards included AT&T (T) and Verizon Communications (VZ), both communications stocks that are interest-rate sensitive. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

Meanwhile, 376 S&P 500 stocks were higher, along with 77 stocks in the Nasdaq-100 Index ($NDX). Dairy-producer Dean Foods (DF), TripAdvisor (TRIP), State Street (STT), E*Trade Financial (ETFC) and Tiffany (TIF) were the S&P 500 leaders.

Among Nasdaq-100 stocks, NetApp (NTAP)added 3.5% to $37.71. Apple (AAPL) fell $3.711 to $441.44. Facebook (FB) was down 21 cents to $24.10. The index was up 21 points to 3,012.

Costco Wholesale (COST), which reports quarterly results on Thursday, hit an all-time high of $115.77 before falling back to $114.83. Electric-auto maker Tesla Motors (TSLA) topped $100 for the first time, closing at $110.33, up $13.25. (Note: An earlier version of this post incorrectly said Costco would report results on Wednesday.)

Crude oil (-CL) finished up 86 cents to $95.01 a barrel. Brent crude was up $1.73 to $104.23. Gold (-GC) fell $7.70 to $1,378.90. 

More on Top Stocks

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19Comments
May 28, 2013 7:59PM
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We need higher interest rates. That bond yields are increasing is a good thing, not a "threat". Prosperity will never be achieved by incessant borrowing. Savers have been punished for more than 5 years. It's well past time they get some relief. 
May 28, 2013 7:33PM
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If interest rates ever reflect the amount of Global Money Printing, the Stock Markets are doomed. Rates are still far too low and any fundamentally sound Economy can take a few points rise in rates. What they can't take, normalized rates that reflect Global Feds gone Mad.
May 29, 2013 4:08AM
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  Rising interest rates ? Are you kidding? Where? Tell me so I can get a cd there. These lower than low interest rates have destroyed my income, thanks to obama, obamacare , bernanke and all the rest of it.
May 29, 2013 1:39AM
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A rally with no economic fundamentals and an idiotic government throwing gas on the fire has turned out well before... don't you think?

 

All the bubbles in the last 15 years have been far worse than they ever would have been because of bad government and Fed policies of artificially low interest rates, loose fed monetary policy, or both.  Politicians set the system up for their crony capitalist buddies and the taxpayers end up paying.  And, yes the crony capitalists suck, but can't we start by blaming the people rigging the game to start with... the guys on Capital Hill?

 

This time interest rates will raise our debt service costs to levels that will bring government deficits to unheard of levels.  Sometime in the near future, the international business community will ALL (some have done it already) stop using U.S. dollars as a reserve currency and stop buying our debt out of fear that we can't pay up (which we can't).  With every bubble, the government intrudes more and more and retards the free market, preventing it from growing or healing.  One of my favorite sayings about government is "If you hate the problems we create... just wait til you see our solutions!".

May 29, 2013 7:25AM
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All comments here say raising interest rates doesn't matter.  What about the retired seniors who depend on

there savings interest to live.  With interest near zero seniors have to use there savings and when that is

gone they will be on welfare and hurt the economy more.

May 29, 2013 6:28AM
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What difference will raising interest rates make now? There are 90 million un and under-employed in America alone and no actual business culture. We are a fully unsustainable nation who, along with 7 other nations and conglomerates, printed an economy instead of rebuilding one. Technology isn't the replacement for industry, it actually kills the chances of enterprise climbing up, growing and hiring. If anyone thinks change happens any other way than to collapse bubble wealth, you will be in for some illumination. False money undermines, false wealth corrupts and false economy starves. Those lead desperate people in one direction only.
May 29, 2013 6:42AM
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Why keep your money in the bank for a measly chump change return

May 29, 2013 11:44AM
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Lowering rates is an attempt by the FED to get people to spend their money, with the threat of inflation.   It usually is followed with the destruction of capital formation, and more unemployment.  

It creates bubbles in commodities, gold, real estate or some other tangible.   It almost always fails.

Economic history shows that Tax increases slam on the economic brakes as well.   

What does jump start growth is TAX cuts, smaller government.  This lets those that earn their money keep and spend it.   It encourages capital formation and business start ups (now at a 23 year low).   

We have the imbecile Obama continuing to try  to tax and print our way to prosperity.  And to spend and borrow our way out of debt...
May 29, 2013 9:22AM
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The Social Security fund gets interest payments from treasuries. The interest paid on special investments made to the fund reflect ongoing current rates. In 2000, the average interest paid was over 6%, in 2012, the average interest paid was, under 1.5%. So rising interest rates might worry investors that aren't properly diversified but sorely help the Social Security Fund which has almost 3 Trillion Dollars collecting a measly, under 1.5%,  thanks to Uncle Ben.

With normalized rates, the return to regular payroll taxes, and Seniors getting more bang for their buck with savings, an entire segment of the population might actually embrace rising rates. They are usually CASH Rich, and rates on the rise will mostly help that Segment. IMHO.

May 29, 2013 8:35AM
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Ya with a 16 trillion dollar national debt guess what, interest rates matter, maybe more then anything else.  I still believe that's the main reason for keeping them low.  Do the math on how much extra money will be needed by the government if you let rates creep up even just a percent or two, very scary very fast.
May 28, 2013 9:57PM
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The economy is limping along; higher interest rates and Obamacare will result in the execution of the economy.  The stock market is propped up by the fed.  Housing is propped up by extremely low rate mortgages. When the bubble pops look for 20 per cent inflation per year, and 10 per cent bank interest.
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Yes, I am soooooooo worried about the first logical attempt to boost the economy of a group that constitutes more than 5% of the population, oh the horror of it all!

wall street bailout
auto makers bailout
bank bailouts
insurance bailout
cash for clunkers
the myriad of "green business" handouts
the 5 + years maintenance of the low interest for banks via currency devaluation
99 weeks of unemployment
Oretardcare
May 28, 2013 11:27PM
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A 'cult,' according to Merriam-Webster, can be defined as "Great devotion to a person, idea, object, movement, or work..(and)..a usually small group of people characterized by such devotion."

Capitalism has been defined by adherents and detractors: Milton Friedman said, "The problem of social organization is how to set up an arrangement under which greed will do the least harm, capitalism is that kind of a system." John Maynard Keynes said, "Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

Perhaps it's best to turn to someone who actually practiced the art: "Capitalism is the legitimate racket of the ruling class." Al Capone said that.

Capitalism is a cult. It is devoted to the ideals of privatization over the common good, profit over social needs, and control by a small group of people who defy the public's will. The tenets of the cult lead to extremes rather than to compromise. Examples are not hard to find.

"Capitalism is the legitimate racket of the ruling class."
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