4 facts about stock returns in rising rate environments
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Insights and Market Perspectives

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

Total return during rising rates vs total return during falling rates.

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
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Publication date: July 3, 2018

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Written by

Steve Bonnyman

Steve Bonnyman, MBA, CFA

Co-Head of North American Research and Portfolio Manager

AGF Investments Inc.

John Vermeer, MBA, CFA

Co-Head, North American Research and Equity Analyst

AGF Investments Inc.

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