So how should we assess how rising rates might alter the investing landscape? Fortunately, there is a lot of historical precedence to lean on. And, as usual with historic data mining, we turn to the great analysts at Bespoke Investment Group.
Bucking the Trend
They observe that from a long-term historical perspective, falling interest rates have been better for equities than rising interest rates. Yet, narrowing our focus on the current bull market, the complete opposite has actually been the case!
The Bespoke table below summarizes the S&P 500’s performance during each period of rising and falling rates in the current bull market, which started in March of 2009.
- In the six periods of rising rates, the S&P 500 has averaged a gain of 21.3% (median = 14.0%), with gains every time.
- In the five periods of falling rates, on the other hand, the S&P 500 averaged a decline of 3.4% (median = -2.4%), with gains only twice.
This is quite a remarkable study, and should give us comfort that once the current bout of volatility is done and rates really do start to move higher, stocks should move higher with them.
Rising Yields a Boon for Most Sectors
Bespoke took their study one step further and compared sector performance during periods of rising and falling rates during this bull market. The study, provided below, shows that every single sector has seen better average returns when rates are rising than when they are falling, led by consumer discretionary and consumer staples. Even looking at median returns instead, the only two sectors that have seen better returns in a falling rate environment are high dividend-yielders like telecom services and utilities.
Furthermore, the only two sectors that have seen positive returns more often in a falling rate environment than a rising rate environment are consumer staples (100% versus 83%) and utilities (80% versus 67%).
When Rising Yields Also Mean Rising Equities
Bespoke analysts conclude that while we will eventually see a reversion to the historical relationship where rising interest rates have been negative for the equity market, the fact that rising interest rates have coincided with gains in the equity market during this bull market makes sense. Here’s why:
Since the financial crisis, Treasurys have served as a safe haven for capital. Whenever the investment landscape has shown signs of tension, investors have pulled back high-beta bets and parked the funds in U.S. government bonds. The buying pushed bond prices up and yields down. Then, when things calmed down, investors took that capital out of Treasurys and redeployed it elsewhere, sending prices down and yields up! It’s elementary, my dear Watson.
With interest rates still on the low extreme of their historical range, a gradual rise in interest rates to more normal levels will be indicative of an improving economy. As a result, the rising cost of money should not snuff out the recovery, but simply lead to a healthier business environment unaided by monetary gimmicks.
InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage, which aims to capture profits of 15% to 40% and often as much as 100% to 200% in less than 90 days.
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