Dow Stocks That Outperform When Rates Rise

The 10-year Treasury yield broke above 3.1% on Wednesday for the first time since 2011, while the two-year note yield is trading at a level not seen in a decade. Investors have been selling off Treasuries due to concerns that rising inflation could lead the Federal Reserve Bank to tighten monetary policy at a faster-than-expected rate.

This uncertainty is attributed to the abrupt end of the nine-year bull market in January and has capped U.S. equity gains in 2018 after a stellar performance last year. The S&P 500 and the Dow Jones Industrial Average (DJIA) index have posted modest gains of 1.6% and 0.2%, respectively, year-to-date (YTD), after both returning at least 19% in 2017. (See also: Stocks Can Still Do Well During Rising Rates: CS.)

12% Average Returns in 3-Month-Periods of Rising Rates

Rising rates aren't bad news for all stocks, as noted in a recent CNBC story that looked at historical data to pinpoint stocks that have posted solid returns in periods when rates rise.

If rates continue to rise over the next three months, Goldman Sachs Group Inc. (GS), Microsoft Corp. (MSFT) and Visa Inc. (V) could be profitable bets, according to CNBC, citing data from the hedge fund analytics tool Kensho, which indicates that the three stocks returned at least 12.1% on average during similar three-month periods over the past decade when rates gained significantly. The study looked at 12 quarters when the iShares 20+ Year Treasury Bond ETF fell more than 5%. Since bond prices move inversely to bond yields, these instances correlate with an environment of rising rates. Goldman was the most-promising play over the 12 periods, returning an average of 17%. 

Apple Inc. (AAPL) and JPMorgan Chase & Co. (JPM) could also be profitable investments if rates continue to increase, posting average gains of 11.8% and 10.9% in the three-month periods of rising rates. Meanwhile, General Electric Co. (GE) and Walmart Inc. (WMT) have historically underperformed their peers with an average loss of 1% and a slight gain of 0.3% respectively over the 12 time blocks. American Express Co. (AXP), Coca-Cola Co. (KO), and consumer giant Procter & Gamble Co. (PG), despite posting average returns of at least 1.7%, have underperformed the blue chip index during similar environments of rising rates since May 2008. (See also: Why Apple, Visa, Goldman Can Outperform as Rates Rise.)