Chart of the week

Equity performance increasingly rate-dependent

This week’s chart looks at duration risk within the equity market and why style agnosticism may be more important than ever in such an environment.

August 20, 2021 | 2 minute read

Rolling 5-year correlation of style vs. 10-year Treasury yield

Source: Bloomberg Finance, L.P., FS Investments, as of July 30, 2021. Value represented by the MSCI USA Value Index. Growth represented by the MSCI USA Growth Index.

  • The 10-year U.S. Treasury yield again declined this week as investors grew anxious about a potential deceleration in U.S. economic growth amid rising COVID-19 case counts along with renewed discussion surrounding the timing of the Fed tapering its monthly bond-buying program.
  • Swift changes in long-term interest rates have had obvious and significant impacts on core fixed income returns this year and over the past several years.
  • Perhaps less obvious to many investors is the increasingly stark relationship between equity market performance and interest rates.
  • Specifically, the correlation of value stocks to 10-year Treasury yields has increased while growth stocks have moved in the opposite direction.1 Said another way, value stocks have outperformed when long-term yields rise while growth stocks — including the technology stocks that have driven much of the post-COVID market recovery — have rallied as rates decline.1
  • While rate activity this year has been somewhat unpredictable, from the sharp and extended spike in Q1 to rates’ subsequent decline despite increased inflationary pressures, the forward-looking environment also appears murky. Major Wall Street banks’ forecasts for the 10-year yield cast a wide net, ranging anywhere between 1% and 2% for the end of this year.2
  • Against this backdrop, investors need to be mindful of duration risk across their portfolios. Taking a balanced style-agnostic approach may be more important than ever to capture returns in rapidly changing markets.   

  • Bloomberg Finance, L.P., F.S. Investments, as of July 30, 2021.

  • The Daily Shot, August 17, 2021. Based on data from survey conducted August 6-12.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

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