It's only one week, but the more than $11 billion in outflows from the SPDR S&P 500 ETF (NYSE:SPY), the world's largest exchange traded fund, for the weeklong period ending Feb. 13proves the month has been unkind to equities.
A staggering $20.38 billion has departed SPY this month, more than the combined inflows to February's top 10 asset-gathering ETFs combined but investors should not blame rising interest rates and surging Treasury yields for the recent weakness in U.S. stocks. Historical data confirm that stocks typically perform well as Treasury yields rise.
The Federal Reserve boosted borrowing costs three times last year, and SPY gained 21.7 percent including dividends paid. Historical data points indicate 2017 followed the long-term trend of stocks rising when interest rates do the same.
For those who believe 2017 was a one-off showing for the S&P 500 in the face of rising rates, it's time to think again.
The first reason to love equities in rising rate times is that they have gained significantly, said S&P Dow Jones Indices. Since 1971, the S&P 500 (TR)has gained about 20 percent on average in rising rate periods, has gained eight of nine times and has gained nearly 40 percent twice with less than a 4-percent loss for its worst rising rate period.
Rising rates coupled with inflation scenarios that describe the current environment can also benefit equities.
Since the rising rates are happening in a profitable economy with strong growth forecastsand increasing dividend payouts (with an extra boost from the income tax reduction), the variables impacting the equity duration are moving to love stocks rather than hate them, said S&P Dow Jones. This makes sense because interest rates may not drive equities but both can rise concurrently from the environment that lifts them.
Data indicate that for every 100 basis points interest rates rise, the positive effects are felt through the U.S. equity market across multiple sectors and market cap segments.
Small-capsled, gaining 7.3 percent on average for every 100 basis point rate increase, followed by mid-caps that gained 5.9 percent and large-caps that gained 2.5 percent, according to S&P Dow Jones.
Every sector, even rate-sensitive groups, gains when rates rise 100 basis points, according to the idnex provider.
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