INSIGHTS

On April 05, 2021

AAM Viewpoints – Equity Performance During and After a Period of Rising Interest Rates

The yield of the 10-year Treasury has risen 80% from the beginning of the year until the time of this writing (3/26/21). This got us wondering where we think we might park our money during a time of rising interest rates, and where to rotate to once they’ve peaked. So, we identified about nine periods of rising rates that also had corresponding index performance data. We calculated the median annualized total returns during and after an interest rate rise, then charted it below.

We believe the chart above shows two very interesting things:

1. How much better high dividend paying securities perform after a period of rising interest rates. For all the periods the S&P 500 High Dividend Index had median annual total return of 12% during a period of rising interest rates, and in the 12 months following the peak it gained another 5.3% for a total of 17.3% median total return. Dow Jones Select Dividend had very similar results. Dividend Aristocrat’s performance was more in-line with value indices, and that’s because it’s not actually a high dividend index with its 12-month dividend yield only at 2.4% whereas the other two dividend indices yield around 4%. Last note, all three dividend indices had a positive return 100% of the time in the 12 months following an interest rate increase.
2. The second take away is the underperformance in the growth space after a period of rising interest rates. The chart shows significant change in the median annualized total return during a period of rising rates, and the 12-months following the peak. In the large cap growth space, their median annual total return falls by 9.2% in the 12 months following the peak of the rising rates. And for small cap growth, it’s even worse, with their median annual total return declining by 12.7%.

If you’d like to dig a little more into the data used for the chart, take a look at the tables below. Looking into the growth-to-value rotation is what began this journey. We’d like to share a few good talking points on how this rotation has some legs. Hopefully they will help you with your asset allocations. We believe that instead of rotating into value in general, investors potentially consider focusing their capital on high dividend paying securities.

Past performance is not indicative of future results.

Past performance is not indicative of future results.

CRN: 2021-0401-9062 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.