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Wednesday, March 10, 2021

Effect of Interest Rate Hikes in the Stock Market (S&P 500) - A Historical Study

If you've been following the financial markets, the chatter in the current environment is the sell-off on global stock markets was driven by fears of an interest rate hike, particularly the 10-Year US treasury yield.

This raises the question: How did the stock market behave with the interest rate spikes in the past? And does a stock market sell-off necessarily follow when there is "spike" in treasury yields?

To answer this inquiry, we decided to check history since the current rate hike is not the first time it happened - in fact, looking at the data, we've visually identified 7 notable rate spikes in the last 40 years. We then checked how the bond prices and stock prices behaved during this "rate hike/spike" period to give us a flavor of what to potentially expect.

10-Year Treasury Yield from 1980 to Present

US 10 Year T-Note Futures (Index used for 10Y Bond Price) from 1980 to Present 

S&P 500 Index from 1980 to Present 

Summary of Results:

  1. This exercise shows us that stock prices (as measured by S&P 500 Index) does not necessary go down when there is an interest rate spike as financial pundits would have you believe
  2. In fact, 5 out of 7 rate hikes identified in the last 40 years actually resulted in the stock market going higher during the rate hike period. Simply put, more than 70% of the time, the stock market actually went higher during rate hike periods
  3. Notably, the average increase in the stock market during the interest rate hike period is 18.16% which is actually a pretty strong performance - this supports the view that equities may stand to actually perform relatively well even if rates start to normalize (coming from a low base)
  4. What is quite certain though, is bonds may not be the place to be in a rising rate environment as bond prices (as measured by US 10 Year T-Note Futures) have gone down 7 out 7 times during the identified rate hike periods
  5. Lastly, though there is still a chance that stocks may still perform poorly as future performance of equities are never certain, what we can conclude from this exercise is that rising rates does not necessarily spell out the end of the world for equities :-)
Indeed, reviewing the data and learning from the past helps put things in a better perspective.

The Filipino Investor

This is not an investment advice and The Filipino Investor shall not be responsible or liable for any trading or investment decisions made based on this information.
The Filipino Investor hereby expressly disclaims any responsibility for any error or inaccuracy in the information.

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