Strategist Cecilia: Rising Rates Can Be 'Good Environment for Stocks'

Many financial commentators are concerned that a Federal Reserve interest-rate increase next year will send bond yields higher, and that in turn will spell an end to the six-year stock rally.

But Ernie Cecilia, chief investment officer at Bryn Mawr Trust, says rising bond yields don't necessarily mean doom for stock prices.

If the Fed tightens to stave off an inflationary spiral, that's a problem for stocks. But if the Fed and bond yields are responding to stronger economic growth, "it’s not a bad environment," Cecilia tells MarketWatch. "In fact, it’s a good environment for stocks."

Historically, bonds don't begin to pull investors away from equities until long-term yields hit 3 or 4 percent, he says. The 10-year Treasury yielded 2.25 percent around midday Friday.

Stocks have risen in tandem with ascending bond yields since the recession ended in June 2009, Pavilion Financial analysts write in a commentary obtained by MarketWatch.

They say the situation will only get worrisome if the 10-year yield surpasses 5 percent.

Meanwhile, research from money manager Ben Carlson shows that in 12 of the last 14 periods that saw sustained Fed rate hikes, the S&P 500 index actually gained. The average return was a stellar 20 percent, compared to 2 percent for bonds.

The 14 periods go back to 1958.

Interestingly enough, Carlson found that stocks don't fare quite as well after the Fed finishes its rate increases. The S&P 500 returned 7.6 percent on average in the year following the tightening of the 14 periods.

Related Stories:

• MarketWatch's Gold: Fed Rate Hikes Don't Hurt Stocks Long Term
• Wells Fargo Strategists: Stocks Rose the Last 2 Times the Fed Began Raising Rates