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Raising Interest Rates Effect On Stock Performance [Infographic]

Dec. 07, 2016 2:05 PM ET2 Comments
Kirk Du Plessis profile picture
Kirk Du Plessis


  • Many investors expect stock prices to decline when the interest rate increases.
  • However, historical data shows that in most cases both stocks and bonds perform well during the year leading up to a rate hike cycle and the year after.
  • Key point: It is very difficult to predict stock performance based on rising or falling interest rates.
  • Our infographic allows you to look into the past and make inferences based on historical data from past rate increases.

Infographic provided by Option Alpha

When interest rates go up, it has an impact on many parts of the U.S. economy - and the stock market. Shrinking the money supply makes it more expensive to borrow money, which causes consumers and businesses to cut back on their spending. This often leads to a reduction in the valuation of companies and their stocks because the cost of doing business goes up while profits tend to decline.

Combine a reduced money supply with lower company valuations and the stock market becomes less attractive to investors. So it's not surprising that when the Federal Reserve raises interest rates (usually to tamp down on inflationary pressures), many investors expect stock prices to trend downward. However, historical data shows that not only do stock prices fail to show an overall decline during rate hike cycles, they almost always perform well during the years before and after a rate hike cycle.

In a study of six rate hike cycles between 1983 and 2004, the S&P 500 index performance took a downturn in only a few cases. In fact, when measured 500 days after the initial rate hike, average index returns during this time period exceeded 14%.

S&P 500 Index Returns Before and After Rate Increases

In general, equities perform well before and after interest rate hikes. However, researchers discovered that their solid performance is usually accompanies by periods of consolidation and increased volatility. This suggests that when investment decisions made before, during and after rate hike cycles should take not use historical rates of return as the sole decision criterion.

Bond Performance

U.S. bonds (as measured by the Barclays Aggregate Bond Index) also performed surprisingly well before and after an interest rate hike. Average returns were slightly higher during the 12 months after a rate hike cycle than in the

This article was written by

Kirk Du Plessis profile picture
Kirk Du Plessis is a full-time options trader, real estate investor, and stay-at-home Dad. A former Mergers and Acquisitions Investment Banker for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he founded Option Alpha in 2007 and currently serves as the Head Trader. What started as a small blog has quickly grown into one of the industry's most respected authorities on options trading with more than 6.4 million visitors each year and 40,000 active members representing 42 different countries. Each day hundreds of new people join this rapidly growing community. Kirk's been interviewed on dozens of investing websites/podcasts and was recently featured in FXTC Magazine as well as Barron’s Magazine as a contributor to their Annual Broker’s Review. Kirk and his wife live with their two daughters in Western Pennsylvania.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

Best Interest Blog profile picture
"However, historical data shows that in most cases both stocks and bonds perform well during the year leading up to a rate hike cycle and the year after."

Except never before in history have interest rates been this low for this long.


Click "max" to see i-rates since 1971. Notice anything?
Investicals profile picture
Seems to me that there is a disconnect regarding the current economic situation in the US. We have the fed wanting to raise interest rates because the economy is finally heating up, where as Trump believes the economy is not doing as well as the market pundits believe.

Hypothetically if we have a economy that had been growing on solid fundamentals (I personally do not believe so) that with this along with the fiscal stimulus from Trump the market should rip way higher.

or if the market was not ready for a hiking cycle, and the main drivers causing this new growth that is expected, is purely from fiscal stimulus, than it seems odd that we would be raising rates.

From my understanding economies get stimulus when they are sluggish and can't grow, along with cuts in interest rates (typically during recessions). So having the fiscal stimulus along with raising interest rates seems like it may cause more of the same rather than some new crazy growth cycle.

I cant seem to wrap my head around why the markets are reacting the way they are unless the economy is heating up as the fed thinks, this would mean that we are getting unnecessary fiscal stimulus. If so, I can completely understand why markets are where they are at.
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