Treasury rates are moving higher, which has historically been positive for equity returns.

U.S. Treasury rates have been increasing for several months and have accelerated in recent weeks.  A narrative has developed that rising interest rates are a negative for equity markets.  We thought it would be helpful to look at the data and see how equity markets have responded to higher interest rates. 

We start out by looking at some periods within the last seven years to make the comparisons more related to what we see today. 

From May 2013 to the end of 2013, the yield on the 10-year U.S. Treasury increased by approximately 1.40%.  During that time, the S&P 500 index increased by approximately 18%. Industrials, Consumer Discretionary, and Materials were the best performing industries, while Utilities and Consumer Staples were the worst.  

Source: Koyfin.

Source: Koyfin.

 

From July 2016 until March 2017, the yield on the 10-year U.S. Treasury rose approximately 1.15%.  During that period, the S&P 500 increased by approximately 14%.  Financials, Technology, Industrials, and Materials were the best performing industries, while Utilities and Consumer Staples were the worst. 

Source: Koyfin.

Source: Koyfin.

 

From September 2017 until November 2018, the yield on the 10-year U.S. Treasury again rose approximately 1.15%.  During that period, the S&P 500 increased by approximately 14%.  Consumer Discretionary, Health Care, and Technology were the best performing industries, while Materials, Utilities, and Consumer Staples were the worst.    

Source: Koyfin.

Source: Koyfin.

 

Since October 2020, the yield on the 10-year U.S. Treasury has increased by approximately 0.90%.  During that period, the S&P 500 has increased by approximately 16%.  Energy, Financials, Industrials, and Materials have been the best performing industries, while Utilities, Consumer Staples, and Real Estate have been the worst.    

Source: Koyfin.

Source: Koyfin.

 

Looking at some periods further back, from June 2003 until July 2006, the yield on the 10-year U.S. Treasury increased approximately 2.0%.  During that period, the S&P 500 increased by approximately 33%.  The best performing industries were Energy, Utilities, Materials, and Industrials, while the worst performing were Health Care, Tech, and Consumer Discretionary.   

Source: Koyfin.

Source: Koyfin.

 

In 1999, the yield on the 10-year U.S. Treasury increased by approximately 1.80%.  During the that period, the S&P 500 increased by approximately 19%.  The best performing industries were Technology, Materials, and Industrials, while the worst performing were Consumer Staples and Utilities. 

Source: Koyfin.

Source: Koyfin.

 

Looking at some recent examples and going back to prior cycles, higher interest rates have initially been a sign that the outlook for the economy and corporate profits was increasing, which should lead to positive equity performance.  Cyclical industries were usually the best performing parts of the equity market.  Based on this analysis, the current increase in interest rates should be viewed as a positive indicator regarding the outlook for 2021.  

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.