The value factor and interest rates have had a strong correlation over the past 10 years versus a relatively benign historical relationship. What could this mean for the factor’s performance in today’s high interest rate and high inflation environment?
- Low and falling interest rates exert a disproportionate impact on cheap stocks versus expensive stocks, a major driver of the strong correlation.
- Expensive stocks tend to be more sensitive to changes in discount rates, so volatile market environments in which risk premia rise typically lead expensive stocks to sell off by more than cheaper stocks.
- Expensive stocks tend to be more sensitive to interest rate changes than cheap stocks, so tend to outperform cheap stocks during falling rate environments.
* Portfolio objectives are not guaranteed. Past performance is not a guarantee or reliable indicator of future results.