Can US Stocks Provide a Safe Haven from Interest and Inflation Risk? A Sector Level Examination of the Response to Unanticipated Nominal, Real Interest and Inflation Rate Shocks

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This paper examines the relation between stock returns and unexpected changes in nominal and real interest rates and inflation for the US stock market. With the exception of Sweeney and Warga (1986), we are the first to examine this relation in detail by breaking the results down from the US stock market level to sector, sub-sector and to individual industries as the ability of different industries to absorb unexpected changes in interest rates and inflation can vary by industry and by time period. Unlike Sweeney and Warga (1986), we also look for stability in the relations by examining them by sector during contraction and expansion sub-periods throughout a long time period, from September 1989 to February 2014. While most significant relations are conventionally negative, some are consistently positive. Specifically, we find that Integrated Oil and Gas, Commercial Services and Supplies and Diversified Metals and Mining have a consistent significant positive relation between stock returns and unexpected changes in real interest rates while Diversified Metals and Mining has a significant consistently positive relation between stock returns and unexpected changes in nominal interest rates. This suggests that investments in these industries can form a safe haven from unexpected changes in real and nominal interest rates respectively. Interestingly, we find that Gold has an insignificant beta during recessionary conditions hinting that investments in the Gold industry can indeed be a safe haven during recessions. However, Gold also has a consistent negative relation to unexpected changes in inflation thereby damaging the claim that an investment in Gold is a hedge against inflation.