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Market Update

Will Low Interest Rates Continue to Fuel Stocks?

Bryan Borzykowski

When the Federal Reserve slashed its Fed Funds rate in 2008 to almost zero, few thought we'd stay near these record-low yield levels all these years later. Yet here we are, with interest rates at a paltry 0.5%. This was supposed to be the year that rates would rise again, but with a sputtering global economy and some less-than-exciting domestic numbers, Janet Yellen has taken at least some additional rate hikes off the table in the near term. At this point, no one knows when rates will rise to normalized levels, or if they even will. Many people, like financial expert Dennis Gartman and Bank of Canada's Stephen Poloz, think we could be in an ultralow interest-rate environment for years, if not decades, to come.

While keeping rates low for long has implications on savings rates and borrowing costs, its biggest impact might be felt in the stock market, which has broken through record highs in large part due to the country's depressed rates. Since March 2009, when the S&P 500 hit rock-bottom, the index has climbed by 195% as of this writing. Of course, there are many reasons why stocks have done well, but a big one is that it makes a lot more sense to be in the stock market than the bond market. Given the low expected returns in bonds, it's easy to see how, even after a runup in prices, stocks can provide better total returns.

Bryan Borzykowski does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.