So how do stock markets, and in particular small caps, perform
during rising rate cycles? The table below, produced by Standard
& Poor’s (S&P), shows small stocks (the S&P 600 and Russell
2000) have tended to outperform larger stocks (S&P 500) when
interest rates rise. Rising interest rates do not automatically
spell doom for stocks.
Inspired by the S&P study, we conducted our own historical
analysis of how the Russell 2000, our small cap benchmark,
performed after rate hikes. We did a study looking back at times
when the Federal Reserve started to raise rates and their resulting
effect on small cap equities performance. Although “this time may
be different” and there are many other contributing factors, this
data gives investors some historical context about the relationship
between rate increases and future market returns. The previous
six times the Fed embarked on a tightening cycle and the
associated small cap returns are seen in the graphic below.