Revisiting Short-Duration Stocks

Although central banks may be near the end of the rate hike cycle, short-duration stocks may still be an attractive investment theme should interest rates remain at higher levels.

A key theme we have supported over the past year is that higher "quality" stocks are likely to outperform the overall market. In April of last year, we wrote about one way we define quality: short duration. Specifically, we stated that short-duration stocks might outperform and act as a hedge against rising rates in a volatile market. Over the past 12 months, short-duration stocks have outpaced the overall market by seven percentage points and acted as a hedge against the losses in the overall market by holding their value.

Short-duration stocks have outperformed consistently until March

Bar chart showing returns of the MSCI World Index and its short-duration segment (lowest quintile by Price to Cash Flow) during March 2023, January and February 2023, fourth-quarter 2022, past 12 months, 2022, and August 2020 through December 2022.

Source: Charles Schwab, FactSet data as of 4/1/2023.

Low price to cash flow = bottom 20% of stocks ranked by price to cash flow in MSCI World Index. Performance relative to MSCI World Index. Past performance is no guarantee of future returns.

While the performance has been largely consistent, short-duration stocks did not outperform in March. Have short-duration stocks started to underperform now that central banks appear close to the end of their rate hike cycles? We don't think so, but we will explore the support and risks for short-duration stocks going forward.