Piper Sandler strategists said Tuesday that higher unemployment rates (UR) could be a bullish sign for the markets as it would likely bring down inflation and interest rates, making risk assets more appealing for investors.

“Seeing a higher UR and lower rates would be bullish in our view as higher rates are everybody’s #1 fear,” strategists said in a note.

Historically, this has also been the case, strategists stressed, and has been observed in five recessions since 1960 where a peak in interest rates coincided with the bottoming out of stock prices.

While the perception of how stocks respond to declining interest rates during a recession is influenced by more recent recessions in 2001 and 2007, the dynamics were notably different during the recessions of 1969, 1973, 1980, 1981, and 1990.

In these earlier periods, stocks declined due to higher rates “and then bottomed as rates peaked,” Piper Sandler noted.

Strategists highlighted two key takeaways from historical analysis of inflation regimes. First, interest rates typically continue to rise into a recession, initially leading to a decline in stock prices. Second, once interest rates begin to fall, stocks start to recover and climb higher.

“This isn’t what we’re used to because most of us are conditioned by, and lived through, the 2001 and 2007 recessions where inflation was low and rates and stocks were positively correlated. We’re playing a totally different game today,” they continued.

“Current correlations point to stocks rallying if rates fall even if we enter a recession,” strategists added.