The Stock Market Threw Its Interest Rate Rules of Thumb out the Window
Something in the market changed about a half-year ago. A dandy old “truism” that had made the rounds for ages got scrapped.
It used to go something like this:
If interest rates are going higher, you should underweight value stocks because that investment style includes large amounts of “bond proxies” like Utilities and Consumer Staples. As rates rise, their dividend yields will lose appeal compared to the income on offer in bonds. You should come back to value stocks only when you think bond yields will fall.
There was just one problem with the old rule of thumb: it didn’t work.
The Fed has, for the better part of a generation, held short-term interest rates at or near zero. The situation has not been much different for longer-dated paper. The 10-Year Treasury note walked into the global financial crisis with a yield north of 5%. Its downtrend persisted for years, slipping all the way to 0.53% during the pandemic. Yet none of that amounted to a hill of beans for value stocks—the investment style has been pummeled by growth in that time.
So much for the old bond proxy rule of thumb.