A relevant example goes back to 2015 when the Federal Reserve raised interest rates after nearly a decade. The stock market, however, showed a relatively restrained response, even posting some gains. You might question the why and how. I believe the fact that the economy was in a steady growth phase, coupled with low inflation and unemployment rates, played an integral part here. Companies were earning, people were spending. The hike was seen more as a sign of economic recovery post the 2008 crisis, leading to a more bullish market sentiment than expected.
As a financial advisor for over 25 years, I have seen several instances where interest rate hikes did not significantly impact the stock market. In 1994, the Fed raised rates 5 times, but the S&P 500 finished up 1.3% for the year. Although high-yield sectors like REITs struggled, broader markets held steady. Investors had anticipated the hikes, and a strong economy offset their impact. More recently, in 2018 the Fed raised rates consistently, yet the S&P 500 rose that year. Companies were thriving, demand was high, and earnings growth offset higher borrowing costs. Markets price in expected rate changes, so if reality is less severe, the impact is muted. Investors weigh many factors, and even with rate hikes, stocks can climb on good news about trade, GDP, or corporate results. Rising interest rates alone don’t predict market declines. The overall picture—economic health, investor sentiment, company performance—matters more. As in life, in markets there are many forces at play; rates are but one. My firm looks at the whole picture for clients, not just interest rates, to make prudent investment devisions.
As an finance executive, I have seen interest rate hikes that didn’t significantly impact markets. In 2018, the Fed raised rates, but the S&P 500 rose that year. Investors had already priced in the hikes, and strong corporate earnings offset their impact. Often rate hikes signify a strong economy, so investors focus more on that. In the 1990s, rates rose steadily but the tech boom and strong growth led markets higher. Companies can still thrive with higher rates if demand and earnings are solid. Markets look ahead, so they often price in expected rate changes. If those changes end up less severe, the impact is muted. Investors also consider many factors, so even with higher rates, stocks can rise on good news about trade, earnings, or economic growth. Rising rates don’t necessarily equal market declines. The overall picture—economic fundamentals, investor sentiment, corporate results—is more important. As in life, in markets there are many forces at play. Interest rates are but one of them.