“A study of seven cycles of higher rates and eight of lower ones in the USA since 1971 shows that US equities do perform better when the Fed is loosening monetary policy, but the results during periods of tightening are not always dreadful,” says Russ Mould, AJ Bell Investment Director. “Our research shows that America’s headline S&P 500 index rises by 19.9% on average during a cycle of lower interest rates, from the first cut to the last, and that it still advances by 10.3% on average when borrowing costs are going up, from the first hike to the last one.”
Mould continues: “Substantial stock market downturns have tended come when the Fed has raised rates, at the same time as equity valuations have been lofty and corporate earnings have disappointed badly, normally due to the onset of recession.”
Notes for Editors
- A spreadsheet showing how the S&P 500 has performed during previous US interest rate cycles dating back to 1971 is available on request.
- US interest rates have been anchored at zero to 0.25% since 2008. The Federal Reserve last raised interest rates in 2006 and last began a fresh rate-rise cycle in 2004.
- Increased interest rates can affect the performance of stocks in three ways. First, higher returns on cash tempt investors to keep their money in the bank, or take it out of equities. Second, bond yields tend to trend higher, again persuading investors to seek higher returns from instruments which are relatively less risky than stocks. Third, interest rates are a key part of the discounted cashflow (DCF) calculation which is fundamental to long-term equity valuations. The higher the rate, the lower the valuation.