History shows that rate increases are not necessarily bad for stocks!

In March 2022, the U.S. consumer price index increased by 8.5% year-over-year. This the highest level of inflation since 1981. After months of denying that inflation was a problem, the U.S. Federal Reserve is now admitting that it’s concerned. So, we have an inflation problem!

To get inflation under control, the Fed started to raise rates, with more aggressive rate hikes to come. The market was already struggling before Russia-Ukraine war started. Rising interest rates undoubtedly hurt stocks in the first quarter of 2022. So, will further rate increases cause more damage to stocks?

We instantly would think yes, and our alarm bells are ringing but surprisingly, history has shown us that rate increases are not necessarily bad for stocks.

In a study of the last eight rising rate cycles, the S&P 500 was up after each initial rate hike by an average of 2.7% after three months, 7.5% after six months and 10.8% after 12 months. In each rising rate cycle, the S&P 500 was up one year later. With other words: In 100% of these rising rate periods, the market kept going up. As a result, if you were not invested in stocks during this rising rate cycles, you missed out on making money. Getting out of the market after the Fed starts raising rates is a mistake.

The most important thing to do when investing in the stock market is to stay invested in the stock market. Do not forget, the stock market is a game that is rigged in our favour. The worst mistake you can make is cashing out at the wrong moment and trying to get in again at the right moment .

Rising rates, flat rates, dropping rates, over the long term, the market does the same thing during all of them: it goes up! We do not have a crystal ball and are not able to predict the future. There will be ups and downs along the way, but anyone with the necessary patience will succeed in the long run.

Sven Franssen