An analysis by AQR Capital Management showed that US stocks returned 5.4% more on average when rates were above their median level.
For most of the year, equity investors have dismissed rising government bond yields as a side effect of better-than-expected economic growth, despite concerns that yields could ultimately weigh on stocks if they climbed too high. Those concerns could take on new urgency after the Fed predicted rates will stay elevated longer than many investors expected.
The S&P 500 has fallen more than 7% from its July highs, hit by sharp drops in shares of some of this year’s biggest winners, including Apple, Amazon and Nvidia. At the same time, benchmark 10-year U.S. Treasury yields are trading near a 16-year high at 4.55%.
With policymakers predicting that rates will remain around current levels until the end of 2024, some investors believe there may be more volatility to come. Higher yields on government bonds - which are sensitive to interest rate expectations and seen as risk-free because they are guaranteed by the US government - offer competition for stock investments, while increasing financing costs for companies and families.
If history teaches us anything, higher rates are a less favorable environment for equity investors. An analysis by AQR Capital Management dating back to 1990 showed that U.S. stocks returned an average of 5.4% more than cash when rates were above their median level - as they are now – compared to an 11.5% return when interest rates were below their median level.
“Stocks are just expensive,” said Dan Villalon, principal and global co-head of portfolio solutions at AQR Capital Management, who believes rates will be higher in the next five to 10 years than they were in the previous decade, with an impact on returns.
AQR’s analysis showed that trend-following hedge funds tend to do better when rates are high, as they hold large cash positions that benefit from higher rates.
The equity risk premium, which compares the attractiveness of stocks to risk-free government bonds, has shrunk for most of 2023 and was last at low levels in about 14 years, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
The current level of the equity risk premium has historically translated into an average 1.3% excess return of the S&P 500 over the 10-year Treasury over a 12-month period, according to Lerner.
Analysts at BofA Global Research argue that stocks — particularly the Nasdaq 100, which has risen 33% in 2023 partly on excitement over advances in artificial intelligence — have until recently the risk of rising rates is ignored.
“Sentiment may be evolving, however. The Nasdaq has started to move inversely to real rates,” the bank’s analysts wrote. “If this continues, the risk is that stocks still have a long way to go to incorporate rate sensitivity again, so there is potential for further declines.”
Of course, many investors believe that the Fed will cut rates as soon as economic growth begins to falter. Futures tied to the Fed’s key policy rate show investors pricing in the first rate cut for July 2024.
Original article published on Money.it Italy 2023-10-11 07:00:00. Original title: I tassi di interesse alti mettono a rischio la crescita dell’azionario USA
