History Shows a Bullish Road Ahead for Stocks Despite Serious Volatility

Well, that would certainly be a nice change of pace from what we’ve seen over the past couple of months.

On the heels of serious fears over inflation and a rise in interest rates from all-time lows, investors have been forced to deal with both, volatility and severe bear market for the bluechip tech sector.

But, as Goldman Sachs’ David Kostin explains, the markets are a bit more complicated than conventional wisdom which would typically tell us that rising interest rates mean higher borrowing costs, and higher yields arguably make bonds a more attractive investment, than stocks.

Instead, the rally in interest rates should actually be giving investors optimism about the stock market. At least that’s what history tells us, according to Kostin:

“Equity mutual fund and ETF inflows have totaled $163 billion since the start of February, the largest five-week inflow on record in absolute dollar terms and third largest in a decade relative to assets. Even though the recent backup in rates has weighed on equity prices broadly, the pace of inflows into equity funds during the last few weeks has accelerated compared with the start of the year.”

“History shows that equity funds generally experience inflows when real rates are rising,” Kostin added. “During the past 10 years, the most favorable backdrop for equity fund inflows has been when both real rates and breakeven inflation were rising. This is intuitive given that the dynamic typically occurs when growth expectations are improving.”

If you needed even more reason to start feeling bullish again, Kostin also forecasts massive equity inflows from households and corporates, which both were hoarding cash during the most worrisome periods of the coronavirus pandemic.

Originally published by Yahoo Finance

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