When Rates Do Rise, Past Is No Prologue

July 01, 2015

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Corey Hoffstein, co-founder and chief investment strategist of Boston-based Newfound Research LLC.

 

With the Fed expected to raise rates sometime within the year if the economy continues to stabilize, some are worried that the green nature of many traders will lead to novice mistakes.

 

The bottom line is that about 30 percent of Wall Street traders began their careers after 2010, according to Emolument.com. Looked at another way, 30 percent of Wall Street traders have not experienced a rate hike during their professional careers, as the chart below shows: 

 

 

But in my opinion, past experience may not be any help either.

 

Deeper Challenges

Why? It all comes down to the curse of dimensionality. At its core, the curse of dimensionality tells us that for each new dimension of data we incorporate, we need exponentially more data to have a statistically significant result.

 

So what does this have to do with rate hikes and prior experience? As usual, a few pictures can illuminate this concept far better than a volume of text.

 

Below I have plotted the 10-year U.S. Treasury rate over the last 40 years. What we see is a variety of market conditions, including persistently increasing rates, persistently decreasing rates, high rates, low rates and everything in between. 

 

Find your next ETF

Reset All