Do Rate Hikes Always Punish Growth Stocks? Think Again

So the numbers don’t support the theory that growth necessarily loses when the Fed raises rates, which perhaps isn’t surprising given the myriad variables that influence stocks prices. That jibes with my earlier finding that there’s no reliable relationship between the level of interest rates and how much investors are willing to pay for stocks, as evidenced by valuations during the past 150 years.

In fact, if one variable has had a discernible impact on the relative performance of growth and value in recent decades, it’s valuation more than interest rates. That may seem surprising because the past three decades are widely associated with nosebleed valuations for growth stocks—and for good reason. Growth was hugely expensive relative to value during the dot-com craze in the late 1990s, and it’s arguably just as expensive today in relative terms.

Less known is that recent decades have also featured the lowest valuations for growth relative to value on record, paving the way for growth’s outperformance. At the end of the 1980s, growth was cheaper relative to value than it had ever been going back to 1926, and it was just as cheap around the 2008 financial crisis. Those humble valuations gave growth stocks room to expand, allowing them to outpace value in the 1990s and in the years after the financial crisis. Notably, the one rate-hiking campaign in which growth lost to value in recent decades coincided with the years after the dot-com bubble.

As long as inflation runs high, there will be plenty of talk about the Fed’s plans and the impact on stocks. Unfortunately, there’s no surefire way to know how stocks will react to the Fed. Next time you hear confident assertions one way or the other, remember that there are numerous—and probably more consequential—forces at work in the stock market than central bankers. 

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.