High interest rates historically have been good for investors
In the past, high rates corresponded with strong economic growth and good returns for both stocks and bonds.
Commentary
High interest rates historically have
been good for investors
In the past, high rates corresponded with strong economic
growth and good returns for both stocks and bonds
Denise Chisholm
Director of Quantitative
Market Strategy
I approach my research by looking at market data through a historian’s
lens. I believe historical patterns, when considered in the appropriate
context, can help investors build conviction about future trends. The
economy has shown surprising strength in recent months. Rather than
celebrate the news, many investors have worried that a strong economy
could push interest rates higher than expected and keep rates high for
longer than expected. As a result, this month I’m focusing on the past
relationship between high interest rates, economic growth, and returns
in the stock and bond markets.
Rates have risen, but they’re not high yet
Real (inflation-adjusted) interest rates on long-term bonds have risen since March 2022
(Exhibit 1). That said, real rates aren’t high by historical standards: As of the end of
September, they stood just below the median real long-term rate of 1.93% going back
to 1935. In other words, the recent steepening trend may simply represent a return to
historically normal interest rate levels. Rates may rise from here, but they are nowhere near
an extreme.
Exhibit 1: Even after a big jump, real long rates are below the historical median
Long-Term Treasury Composite Minus Trailing CPI, 1935–September 2023
Past performance is no guarantee of
future results.
CPI: Consumer Price
Index. Real long interest rates: Interest
rate of Fidelity’s Long-Term U.S.
Treasury Composite index minus the
trailing 12-month change in the
Consumer Price Index. All data
gathered and analyzed quarterly from
December 1935 to September 2023.
Sources: Haver Analytics and Fidelity
Investments, as of 9/30/23.
–10%
–5%
0%
5%
10%
1935
1941
1947
1953
1959
1965
1970
1976
1982
1988
1994
2000
2005
2011
2017
2023
High interest rates historically have been good for investors
|
2
High rates typically have come with strong
economic growth
The prospect of higher interest rates often makes
investors fret about the economy. But historically, high
rates and strong economic growth often have gone
hand in hand (Exhibit 2). (There were exceptions,
including the recession of 1974 and early 1975.)
But since 1935, rolling annual real GDP grew 4%,
on average, when real long rates reached the top
quartile of their historical range. As I noted in both
my September commentary and the most recent
Investment Research Update, accelerating economic
growth historically has corresponded with strong stock
returns—even when interest rates were rising.
Exhibit 2: Higher real rates, stronger economic growth
Average NTM Real GDP Growth in Rolling 12-Month Periods by
Quartiles of Real Long Rates, 1935–Present
Exhibit 3: Periods with higher real rates had better average
earnings and NTM stock returns
Average EPS Growth and Average NTM S&P 500 Percent
Change by Quartiles of Real Long Interest Rates, 1935–Present
Past performance is no guarantee of future results.
Rolling 12-month periods.
GDP: Gross domestic product. NTM (next 12 months) real GDP growth: forward
12-month change in GDP minus the trailing 12-month change in the Consumer
Price Index. Real long interest rates: Interest rate of Fidelity’s Long-Term U.S.
Treasury Composite Index minus the trailing 12-month change in the Consumer
Price Index. All data gathered and analyzed quarterly from December 1935 to
September 2023. Sources: Haver Analytics and Fidelity Investments, as of 9/20/23.
Past performance is no guarantee of future results.
Rolling 12-month periods.
EPS: Earnings per share. NTM: Next 12 months. Real long interest rates: Interest
rate of Fidelity’s Long-Term U.S. Treasury Composite Index minus the trailing
12-month change in the Consumer Price Index. Stock returns based on the S&P
500. All data gathered and analyzed quarterly from December 1935 to September
2023. Sources: Haver Analytics and Fidelity Investments, as of 9/30/23.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Q1
Lowest real rates
2%
3%
3.4%
4%
Q4
Highest real rates
Q3
Q2
Higher real rates also have corresponded with
stronger earnings and stock returns
Historically, periods of higher real interest rates
tended to be associated with better earnings growth,
on average, and were followed by stronger average
12-month returns for the S&P 500. Since 1935,
aggregate earnings growth for the S&P 500 index
averaged 26% in the 12-month periods when real long-
term interest rates were in the highest quartile of their
historical range, and, following those periods, the S&P
500 posted 15% average 12-month returns (Exhibit 3).
Q1
Lowest real rates
11%
6%
9%
10%
15%
13%
21%
26%
Q4
Highest real rates
Q3
Q2
Year-over-year earnings growth
NTM S&P 500 returns
High interest rates historically have been good for investors
|
3
Bonds fared especially well after high real rates
The rise in interest rates since early 2022 has pummeled
the bond market. Real rates recently approached the
top half of their range since 1935, and further increases
could push them into the third quartile. If the past is
prologue, that might be good news for the classic
60/40 portfolio: Stocks’ risk-adjusted returns historically
were strong when real interest rates were in the top
two historical quartiles—and bonds’ were even better
(Exhibit 4).
Exhibit 4: Bonds performed best when real rates were high
Risk-Adjusted Returns of Stocks and Bonds in Quartiles of Real
Rates, 1935–Present
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Q1
Lowest real rates
0.14
0.29
0.67
0.71
0.96
0.5
0.82
1.03
Q4
Highest real rates
Q3
Q2
Risk-adjusted return—bonds
Risk-adjusted return—stocks
Total Return/Standard Deviation
Past performance is no guarantee of future results.
Rolling 12-month periods.
Real long interest rates: Interest rate of the Long-Term Treasury Composite index
minus the trailing 12-month change in the Consumer Price Index. Risk-adjusted
stock returns based on the S&P 500’s total return divided by its standard deviation;
risk-adjusted bond returns based on Fidelity’s U.S. Long Treasury Composite Index
total return divided by its standard deviation. All data gathered and analyzed
quarterly from December 1935 to September 2023. Sources: Haver Analytics and
Fidelity Investments, as of 9/30/23.
This analysis and my other research give me a positive
outlook for both stocks and bonds.
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Author
Denise Chisholm
Director of Quantitative Market Strategy
Denise Chisholm is a market strategist in the
Quantitative Research and Investments (QRI)
division at Fidelity Investments. In this role, she
is focused on historical analysis, its application
in diversified portfolio strategies, and ways
to combine investment building blocks, such
as factors, sectors, and themes. In addition to
her research responsibilities, Ms. Chisholm is
a popular contributor at various Fidelity client
forums, is a LinkedIn 2020 Top Voice, and
frequently appears in the media.
Prior to assuming her current responsibilities in
September 2020, Ms. Chisholm held multiple
roles within Fidelity, including sector strategist,
research analyst on the Megacap Research team,
research analyst on the International team, and
sector specialist.
Fidelity Thought Leadership Vice President Mike
Tarsala provided editorial direction for this article.
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