Even in a recession, lower interest rates will be good for markets

Piper Sandler strategists said on Tuesday that rising unemployment could be a bullish sign for markets because it could lower inflation and interest rates, making risk assets more attractive to investors.

“We believe rising UR and falling rates would be bullish as rising rates are everyone's first fear,” the strategists said in a note.

The strategists stressed that this has also been the case historically, having been observed in five recessions since 1960, in which peaking interest rates coincided with bottoming in stock prices.

While perceptions of how stocks respond to falling interest rates during recessions were influenced by the recent recessions of 2001 and 2007, the dynamics were markedly different during the 1969, 1973, 1980, 1981, and 1990 recessions.

Piper Sandler pointed out that in the early days, stocks fell as interest rates rose, “and then bottomed out as interest rates peaked.”

Strategists highlighted two key takeaways from the historical analysis of inflationary regimes. First, interest rates typically continue to rise during a recession, initially causing stock prices to fall. Second, once interest rates start to fall, stocks begin to recover and move higher.

“This is not what we are used to, as most of us lived through the 2001 and 2007 recessions, when inflation was low and interest rates and stocks were positively correlated. Today we are playing a completely different game,” they said continued.

“Current correlations suggest that even if we enter a recession, stocks will rise if interest rates fall,” the strategist added.

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