Capital Ideas^TM

“T-bill and chill” might have been a great investment tactic in 2023, but our analysis shows that investors would be better served by diversifying into stocks once interest rate peaks. Over the past four US hiking cycles (from 1977 to 2023), global equities generated an average cumulative return of 14% in the 12 months following the last US Federal Reserve (Fed) interest rate hike. Cash, on the other hand, only generated a return of 4.5%.

For investors who are worried they may have already missed the boat with equities, it is important to remember that the S&P 500’s strong run in 2023 was mostly driven by the ‘Magnificent Seven’. Valuations outside these seven companies are fairly normal. History also tells us that narrow market rallies coming out of a recession have often been followed by steady gains for the broader market, which means investors can still benefit greatly from putting their cash in the asset class.

Equities have outpaced cash after rate peaks

Past results are not a guarantee of future results

As at 30 September 2023. Returns reflect the average cumulative return in US$ terms over each of the first 12 months immediately following the last increase in the target US Federal Funds Rate (“last Fed hike”) over the prior four hiking cycles. The specific ending months for the periods included in the average calculations are: February 1995, May 2000, June 2006, and December 2018. Global equities are represented by the MSCI ACWI (with net dividends reinvested). Global Bonds are represented by the Bloomberg Global Aggregate Total Return index. Cash is represented by the Bloomberg US Treasury Bills 1-3 months total return index. Fed: US Federal Reserve. Sources: Capital Group, FactSet

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