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Will The Bull Market Cease When Rates Rise?

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Will The Bull Market Cease When Rates Rise?

June 16 2015, 06.50am GMT

STOCK.com

There appears to be a mistaken belief among market investors that an increase in interest rates will result in an end to the bull market. Despite this widespread perception, statistics seem to show otherwise.

History has shown that there might be a pause in the bullish conditions after an interest hike announcement, but conditions revert to those prior to the interest hike after a short period.

Prior to the previous Federal Open Market Committee (FOMC) policy meeting in March, Brian Belski, chief investment strategist at BMO Capital Markets, did an in depth analysis of the S&P 500 index’s (SPX, -0.46%) performance before and after interest hikes, going back to 1980. He found that the index has risen by 8.3% in the six months ahead of an interest rate hike with an additional increase of 3.7% in the six months after the first rate hike.

These figures seem to suggest that it all is plain sailing for market investors after a rates hike. The figures do however show that there has been a significant retreat seen in the S&P 500 at some point in the period after the initial rates hike within the upward trend.

Scott Tonneson and Robert Doll of Nuveen Asset Management did an analysis from 1986 onwards, prior to the June Fed meeting, similar to that done by Brian Belski before the March meeting.

Reporting on their findings they said, “In most cases, equities performed well prior to Fed rate increases, then struggled or declined slightly after the onset of rates hikes, only to recover and outperform in the two years following the first rates increase.”

Benefitting from the 20/20 vision of hindsight, they found that the numbers were different after each of the rates hikes, but on average, they saw a difference of around 10% between the highs before the rate increase and the lows after the increase. The prices however recovered and then exceeded the earlier highs in the six month period after the rates increase.

The caveat in the current situation is that rates are near zero for the first time in history and there is no historical basis from which to forecast the effects of a rates hike on the markets from such a low base.

Tonnesen and Doll are of the opinion that the low base will in fact give the Fed more room to deliver on rates hikes without negatively affecting economic growth. In keeping with past trends, they expect the equities market to outperform other asset classes in the event of an interest rates increase.

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