A long-time friend and even longer-time veteran of Tech stock investing pinged us about our recent 2013 “taper tantrum” piece, which concluded that US stocks were hardly affected by the backup in yields that year. He was curious to know if the backup in yields during 2013 caused any notable change in market leadership once bonds began to sell off. A great question, which we will answer today.
As a reminder, the chart below shows how US 10-year Treasuries traded in 2013 (solid red line, left hand axis) versus the S&P 500 (green dotted line, right axis). May 22 (highlight box) was the date of then-Fed Chair Bernanke’s ill-judged comment at a Congressional hearing about a potential tapering of bond purchases. As you can see, rates went pretty much straight from 2 percent in late May to 3 percent in September. Keep in mind that the Fed did not taper bond purchases at all in 2013. Also, the S&P 500 returned 32 percent in 2013, its best performance of the 2000s.
Now let’s compare S&P 500 sector performance for the pre-taper tantrum part of 2013 (January – May 21) and see how it compares to the “tantrum” itself. The S&P has mixed up its sectors since then, so keep in mind that GOOG and FB were in Technology in 2013 and DIS and NFLX were in Consumer Discretionary. Also, Real Estate was still in Financials in 2013.
Pre-tantrum (up to the day of Chair Bernanke’s testimony, in order of price performance):
- Health Care: +23.6 percent
- Financials: +22.3 pct
- Consumer Discretionary: +21.5 pct
- Consumer Staples: +19.1 pct
- Industrials: 17.0 pct
- S&P 500: 17.0 pct
- Energy: +16.4 pct
- Utilities: +15.1 pct
- Technology: +11.3 pct
- Materials: +9.9 pct
Here are the sectors that continued to outperform over the balance of 2013, during the bond market selloff (S&P +10.7 pct over this period):
- Industrials: +17.8 percent
- Consumer Discretionary: +15.9 pct
- Health Care: +12.5 pct
These are the sectors that went from underperformers pre-tantrum to outperformers after May 21st:
- Materials: +12.1 pct
- Technology: +11.3 pct
Here are the sectors that went from outperformers pre-tantrum to underperformers:
- Financials: +9.1 percent
- Energy: +6.5 pct
- Consumer Staples: +3.4 pct
And, wrapping up, Utilities underperformed both before and after May 22nd (down 5.6 pct).
Takeaway (1): not many surprises in terms of what worked either all the way through 2013 or flipped to outperformance after May 22nd – they are almost all cyclical groups. Health Care is the one obvious exception. We’re lumping Technology into “cyclicals” because that’s what they were until about 2015, after which they started “eating the world”.
Takeaway (2): the groups that stopped working after May 22nd, 2013 had different reasons for doing so.
- Staples rolling over makes sense given their dividend yields make them sensitive to long term interest rates. Seeing Utilities sell off fits the same narrative.
- Financials had a huge start to 2013, so their marginal underperformance after Bernanke’s comments is understandable.
- Energy also had a strong pre-tantrum run but recall that WTI oil prices ran +$90/barrel for much of 2013 thanks to incremental Chinese demand. Markets felt, rightly as it turns out, that more supply would come online soon enough and this limited the group’s “tantrum” gains.
Takeaway (3): while the Federal Reserve has not yet tipped its hand on tapering bond purchases in 2021, we think the 2013 experience is a reasonable investor roadmap for when it does. We continue to like:
- Financials, which no longer have the drag of Real Estate in the sector (the S&P Bank Index was up 17 pct from mid-May through year end 2013)
- Energy (a better commodity price story than 2013)
- And Industrials, for leverage to a global economic reopening