Broker Check

When Interest Rates Rise

| March 16, 2017
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The Federal Reserve raised interest rates by 0.25% yesterday, the third increase in the last 18 months.  What does history say about investment returns during extended periods of rising interest rates?

1964 to 1981 represents the most extreme stretch of rising rates in modern history.  The 10-year Treasury Note yield jumped over 10%, from 4.2% to 14.6% in 18 years.  As the chart above shows, longer-term bonds (20-year maturities) and large cap growth stocks (S&P 500) were most negatively effected, the former returned only +2.5% per year and the latter just +6.9% per year, while inflation averaged +6.4%.  Shorter-term bonds (1-year maturities) managed a small gain above inflation -- +7.0% per year.  But most of the gains during this period of higher interest rates came from smaller and more value-oriented stocks.  The US large cap value asset class returned +11.3% a year, US small cap stocks returned +13.3%, and US small cap value returned +16.7%.  While no one can predict whether future markets will resemble the past, evidence from history strongly supports the need to diversify broadly across and within asset classes to increase the probability that you can achieve your long-term goals.

If you feel like you would benefit from a second opinion about your current investment portfolio and if it's appropriately diversified for your goals, feel free to touch base with us.  We would be happy to talk with you further about your financial situation.

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Past performance is not a guarantee of future results.  The performance of indexes includes the reinvestment of dividends but does not include other expenses associated with real-world investments such as expense ratios and advisory fees.  The content is provided for informational purposes only, and should not be construed as a recommendation of any particular security, strategy, or service.

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