4 facts about stock returns in rising rate environments
Author: Steve Bonnyman
July 10, 2018
By: Steve Bonnyman, John Vermeer and Jonathan Lo
Equity markets face a growing risk in rising interest rates, but history shows they can still do well depending on how fast and how high rates climb from here:
1 | Holding their own by comparison
The S&P 500 netted a total annualized return of 9.4% during the period of rising interest rates between 1954 and 1981, but gained 11.6% during the falling rate cycle that has occurred since then through July 2016.
Source: Bank of America Merrill Lynch, for period from Jan 1954 to March 2018
2 | Slower over faster
Equity markets have tended to perform better when bond yields have increased slowly and especially when the gradual climb in rates has been the result of a stronger economy. But stocks haven’t been so lucky when yields jumped more sharply and/or pushed higher than expected due to a shock in the system such as an upside surprise in inflation or unexpected hawkish monetary policy.
Source: Citi Research for period from December 1927 to April 2018
3 | Lower has been better
S&P 500 returns have been best in rising rate environments when the U.S. 10-year treasury yield has ranged between 2-3%, but average returns only turned negative once the yield surpassed 6%.
Source: Bank of America Merrill Lynch, for period from Jan 1953 to March 2018
4 | Returns and rates go hand in hand
Stock returns and bond yields were negatively correlated most of the time from the 1960’s to 2001, but they’ve moved more in lockstep with each other in the lower rate environment that has unfolded so far this century. This includes 2013, the best year for stocks in the current bull market run.
Source: Bank of America Merrill Lynch, Bloomberg
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.
The commentaries contained herein are provided as a general source of information based on information available as of June 5, 2018. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. The content intends to provide you with general information and is not intended to be comprehensive investment advice applicable to the circumstances of the individual. We strongly recommend you consult with a financial advisor prior to making any investment decisions. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by AGF Investments.
This document is intended for advisors to support the assessment of investment suitability for investors. Investors are expected to consult their advisor to determine suitability for their investment objectives and portfolio.
Any financial projections are based on the opinions of the portfolio managers and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements.
Publication date: July 3, 2018
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2022 AGF Management Limited. All rights reserved.