Despite the recent turbulence, historically, “equities have gained significantly in periods of rising rates,” wrote Jodie Gunzberg, managing director and head of U.S. equities at S&P Dow Jones Indices, in an email. “Since 1971, the S&P 500 has gained about 20% on average in rising rate periods, has gained 8 of 9 times and has gained nearly 40% twice, with less than a 4% loss for its worst rising rate period.” Gunzberg’s analysis evaluated the benchmark U.S. index on a total-return basis.
“Since the rising rates are happening in a profitable economy with strong growth forecasts and increasing dividend payouts (with an extra boost from the income tax reduction), the variables impacting the equity duration are moving to love stocks rather than hate them. This makes sense because interest rates may not drive equities but both can rise concurrently from the environment that lifts them.”
Per her analysis, for every 100 basis point increase in interest rates, every sector, investment strategy, and market-capitalization size category rises. Small stocks see the biggest gain, rising an average of 7.3% on every 100 basis-point rise, while mid-cap stocks gain 5.9% and large-cap stocks advance 2.5%, on average.
“The growth acceleration that cancels the negative equity duration is the same growth that propels small-caps so much, putting them in a leading spot to rise with interest rates – especially since monetary policy is not too tight so that rising interest rates don’t hinder the borrowing by small companies too much,” Gunzberg wrote.
Time will tell, but monetary expansion since 2009 could also add up to this possibility