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Animation: Visualizing U.S. Interest Rates Since 2020

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Visualizing Interest Rates Since 2020

In March 2020, the U.S. Federal Reserve cut already depressed interest rates to historic lows amid an unraveling COVID-19 pandemic.

Fast-forward to 2022, and the central bank is grappling with a very different economic situation⁠ that includes high inflation, low unemployment, and increasing wage growth. Given these conditions, it raised interest rates to 2.25% up from 0% in just five months.

The above visualization from Jan Varsava shows U.S. interest rates over the last two years along with its impact on Treasury yields, often considered a key indicator for the economy.

Timeline of Interest Rates

Below, we show how U.S. interest rates have changed over the course of the pandemic:

DateFederal Funds Rate (Range)Rate Change (bps)
July 27, 20222.25% to 2.50%+75
June 16, 20221.50% to 1.75%+75
May 5, 20220.75% to 1.00%+50
March 17, 20220.25% to 0.50%+25
March 16, 20200.00% to 0.25%-100
March 3, 20201.00% to 1.25%-150

In early 2020, the Federal Reserve cut interest rates from 1% to 0% in emergency meetings. The U.S. economy then jumped back from its shortest recession ever recorded, partially supported by massive policy stimulus.

But by 2022, as the inflation rate hit 40-year highs, the central bank had to make its first rate increase in over two years. During the following Federal Reserve meetings, interest rates were then hiked 50 basis points, and then 75 basis points two times shortly after.

Despite these efforts to rein in inflation, price pressures remain high. The war in Ukraine, supply disruptions, and rising demand all contribute to higher prices, along with increasing public-debt loads. In fact, a Federal Reserve estimate suggests that inflation was 2.5% higher due to the $1.9 trillion stimulus, an effect of “fiscal inflation.”

Impact on the Treasury Yield Curve

The sharp rise in interest rates has sent shockwaves through markets. The S&P 500 Index has steadily declined 19% year-to-date, and the NASDAQ Composite Index has fallen over 27%.

Bond markets are also showing signs of uncertainty, with the 10-year minus 2-year Treasury yield curve acting as a prime example. This yield curve subtracts the return on short-term government bonds from long-term government bonds.

When long-term bond yields are lower than short-term yields—in other words, the yield curve inverts—it indicates that markets predict slower future growth. In recent history, the yield curve inverting has often signaled a recession. The table below shows periods of yield curve inversions for one month or more since 1978.

Yield Curve Inversion DateNumber of MonthsMaximum Difference (10 yr - 2 yr bps)
Aug 197821 -241
Sep 198013 -170
Jan 19824 -71
Jun 19821 -34
Dec 19886 -45
Aug 19892 -18
Jun 19981 -7
Feb 200010 -51
Feb 20061 -16
Jun 20061 -7
Aug 20067-19
Jul 20222*-48

*Data as of September 9, 2022
Source: Federal Reserve

For example, the yield curve inverted in February 2000 to a bottom of -51 basis points difference between the 10-year Treasury yield and the 2-year Treasury yield. In March 2001, the U.S. economy went into recession as the Dotcom Bubble burst.

More recently, the yield curve has inverted to its steepest level in two decades.

This trend is extending to other countries as well. Both New Zealand and the UK’s yield curves inverted in August. In Australia, the yield spread between 3-year and 10-year bond futures—its primary measure—was at its narrowest in a decade.

What’s On the Horizon?

Sustained Treasury yield inversions have sometimes occurred after tightening monetary policy.

In both 1980 and 2000, the Federal Reserve increased interest rates to fight inflation. For instance, when interest rates jumped to 20% in 1981 under Federal Reserve Chairman Paul Volcker, the U.S. Treasury yield inverted over 150 basis points.

This suggests that monetary policy can have a large impact on the direction of the yield curve. That’s because short-term interest rates rise when the central bank raises interest rates to combat inflation.

On the flip side, long-term bonds like the 10-year Treasury yield can be affected by growth prospects and market sentiment. If growth expectations are low and market uncertainty is high, it may cause yields to fall. Taken together, whether or not the economy could be headed for a recession remains unclear.

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This article was published as a part of Visual Capitalist's Creator Program, which features data-driven visuals from some of our favorite Creators around the world.

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Markets

Recession Risk: Which Sectors are Least Vulnerable?

We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.

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Recession Risk: Which Sectors are Least Vulnerable?

Recession Risk: Which Sectors are Least Vulnerable?

This was originally posted on Advisor Channel. Sign up to the free mailing list to get beautiful visualizations on financial markets that help advisors and their clients.

In the context of a potential recession, some sectors may be in better shape than others.

They share several fundamental qualities, including:

  • Less cyclical exposure
  • Lower rate sensitivity
  • Higher cash levels
  • Lower capital expenditures

With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.

Recession Risk, by Sector

As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:

SectorMargin (p.p. change)
🛒 Retail
-0.3
📝 Paper-0.8
🏡 Household Equipment-0.9
🚜 Agrifood-0.9
⛏️ Metals-0.9
🚗 Automotive Manufacturers
-1.1
🏭 Machinery & Equipment-1.1
🧪 Chemicals-1.2
🏥 Pharmaceuticals-1.8
🖥️ Computers & Telecom-2.0
👷 Construction-5.7

*Percentage point changes 2021- 2022.

Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.

Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.

In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.

What to Watch: Corporate Margins in Perspective

One salient feature of the current market environment is that corporate profit margins have approached historic highs.

Recession Risk: Corporate Margins Near Record Levels

As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.

According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.

Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.

Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.

Sector Fundamentals Looking Ahead

How are corporate metrics looking in 2023?

In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.

Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.

For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.

S&P 500 SectorPercent of Companies With Revenues Above Estimates (Q1 2023)
Health Care90%
Utilities88%
Consumer Discretionary81%
Real Estate
81%
Information Technology78%
Industrials78%
Consumer Staples74%
Energy70%
Financials65%
Communication Services58%
Materials31%

Source: Factset

Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.

Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.

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