There is a consistent pattern to the performance of stocks in rising rate environments. TPA has been telling clients about these patterns for years. The table below shows the performance analysis for the 8 distinct rising rate environments since 1996. The 10-Year Yield rose an average of 69% during these periods and the performance of U.S. stock sectors and U.S. broad categories of stocks is fairly consistent when rates rose.
The 10-Year Yield is up 83% from its 8/4/20 low, but TPA sees a good possibility that it will rise measurably higher in the coming months. If rates do rise, the course for where to be positioned has been well mapped out by previous performance patterns. The table below shows the average performance and the percent of times each category has outperformed the benchmark S&P500 when rates rose.
In the 10/26/20 World Snapshot, TPA wrote about the coming rate rise and pointed out which areas have consistently performed well and which areas have consistently underperformed in previous rising rate environments. TPA wrote:
“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”
Since 8/4/20 only TECH, Consumer Discretionary, and Telecomm have broken with the historical pattern. TPA believes that this is due to the anomaly of the large March drawdown and the huge rise in the first 2 sectors immediately following the March lows. Transports, Financials, Industrials, and Materials were at the top of the list (consistent with the historical record) and Utilities, REITs and Srtapoles were the worst performers (consistent with the historical record).
In the broad categories, Small Cap Growth and Small-cap beat out Large Cap Value and Large Cap, which was predicted by the historic pattern.
Technically, the 10 Year Yield is poised to move higher.
Chart 1 below shows that the 10 Year has broken above its 2-year downtrend. Chart 2 shows that the yield is in the middle of its 30-year trading range/descending channel. The range right now is approximately -0.5% to 2.0%.
