WHAT OUTPERFORMS HISTORICALLY WHEN RATES RISE
The U.S. 10 Year Yield has risen from a 30-year low of 0.5069% on 8/4/20 to Friday’s close of 0.8128%; a rise of 60% in 80 days - albeit from a very low base. Before going back to look at historical performance in rising rate environments, it is helpful to look at where the 10-Year is technically. Technically, the 10 Year has moved above a couple of short-term downtrends, but is now up against its 2-year downtrend line. A breakout here could be important (chart 1). On a much longer-term basis, the 10 Year Yield has been declining in a channel for the past 30+ years. Chart 2 shows that currently the 10 Year Yield is closer to the bottom of its current 0.0% to 2.5% range, but has yet not completed the down cycle of its long-term pattern. All of this is to say that we cannot conclude we are in a sustained rising rate environment at this juncture.
If the 10 Year Yield can break out of its 2-year trend, the recent rise may become a sustained pattern. If that is the case, TPA would expect the historic performance patterns during a future rising-rate period to prevail.
The table below looks at rising-rate periods since 1995. TPA identified 7 periods when the U.S. 10 Year Yield rose an average 67%. In the periods 1/18/96 to 6/12/96, 10/5/98 to 1/20/00, 6/13/03 to 6/14/04, 12/30/08 to 4/5/10, 7/4/12 to 12/13/13 , 7/8/16 to 3/13/17, and 9/7/17 to 11/8/18 the 10 Year Yield increased 27.84%, 63.09%, 56.48%, 94.15%, 75.81%, 93.37%, and 58.79%, respectively.
TPA measured and ranked the performance of the following for each period:
1. Major U.S. sectors
2. Broad market cap categories
3. Commodities
The table below also shows:
1. The average performance over the 7 periods
2. The average performance rank over the 7 periods
3. The percent of the time the sector or category outperformed the S&P500 for the 7 periods
4. The percent of the time the performance was positive for commodities for the 7 periods
TPA came to the following conclusions for expected performance during rising rate periods:
1. The 4 best performing sectors are:
· TECH
· Consumer Discretionary
· Industrials
· Materials
2. The 4 worst performing sectors are:
· Utilities
· Telecomm
· REITs
· Staples
3. The 2 best performing broad categories are:
· Small Cap Growth
· Small Cap
4. The 2 worst performing sectors are:
· Large Cap Value
· Large Cap
5. Commodities: Crude and Copper are positive over half the time. Crude is the best performing commodity, historically. Gold is the worst-performing commodity; it is only positive 14% of the time.
6. 2 more focus items:
· TECH beat the S&P500 100% of the time
· Utilities underperformed the S&P500 100% of the time
Whether we are in a sustained rising rate environment has not been determined, but a breakout over the 2-year downtrend would indicate that rates are going higher for the medium-term. A move to around the 1% level would indicate a breakout. If we are in a sustained rising rate environment, clients should position themselves along the lines of the historical performance patterns indicated in the table below.
