Before we illustrate on what stocks investors can add to their portfolios during the interest rate hike, let us explain what happen during and after the rise. In general, when inflation rise, the central banks around the world raises interest rates to reduce the inflation to around 2 percent. The increasing of the interest rates affect entire economy. For instance, loans, such as mortgages, car loans and business loans, become more expensive, which slow down cash flows. Therefore, force businesses to amend or pause plans for growth.
In the exchange market, higher interest rates can also incentivize investors to sell their assets to generate profits, especially in times when there’s been a few years of double-digit percentage returns on stocks. Automatically, investor decisions selling their investments can lower stock prices.
Relationship Between The Rate Rise And The Stocks
The table below illustrates data during five most interest rate rise cycle, by the United States Federal Reserve, which shows that the three leading stock market indexes, DJIA, S&P 500, and Nasdaq, only declined during one rate hike cycle between 1999 to 2001. Based on the chart below we have enough evidence to believe that rising interest rates can not necessary lead to falling stocks.
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| Interest rates rise | DJIA | S&P 500 | Nasdaq |
| 1994 to 1995 | 16.30% | 13.80% | 18.10% |
| 1997 to 1998 | 17.40% | 32.60 | 40% |
| 1999 to 2001 | -1.60% | -5.% | -13.30% |
| 2004 to 2007 | 28.70% | 30% | 26.90% |
| 2008 to 2019 | 213.70% | 243.10% | 442.% |
| Average%Change | 54.90% | 62.90% | 102.70% |
| Median%Change | 17.40% | 30% | 26.90% |
Source: Dow Jones Industrial DIA
What Is The Effects Of Interest Rate Hike In Short Term
In the following chart, which shows performance of the S&P 500 over the nine the United States Federal Reserve rate hikes between December 2015 and December 2018, the result was different:
| Data | Increase | S&P 500 1st day return | S&P 500 1st month return |
| 12.16.2015 | 0% | -0.7% | -9.3% |
| 12.14.2016 | 0% | 0.4% | 0.9% |
| 3.15.2017 | 0% | 0.7% | -2.3% |
| 6.14.2017 | 0% | -0.3% | 1.4% |
| 12.13.2017 | 0% | -0.5% | 4.6% |
| 3.21.2018 | 0% | 0.7% | 3.8% |
| 6.13.2018 | 0% | 0.9% | -5.4% |
| 9.26.2018 | 0% | 0.1% | -8.5% |
| 12.19.2018 | 0% | -3.1% | 6.6% |
| Average%Change | -0.4% | 0.9% | |
| Median % Change | -0.3% | 0.9% |
Source: Yahoo finance.
Analyse from the above chart illustrates that, when the United States Federal Reserve announced interest rate increase on December 13, 2017, the S&P 500 dropped 0.5 percent over the next day of the announcement. However, the S&P 500 gained 4.6 percent after one month. On the other hand, the interest rate increase on September 26, 2018 resulted the S&P 500 gain marginally over the next day, but fall 8.5 percent after one month.
Unlike the long-term result mentioned earlier, short-term market moves after the interest rate increases present a mixed results. Therefore, the result may be confused for day traders. Fortunately, for long term investors or buy-and-hold stock market investors, the interest rate rise is favourable.
What Are The Best Stocks To Pick During Rate Rise
The interest rate rise events don’t impact stocks equally. In fact, the interest rate increase can result certain sectors, such as financial stocks, to increase. Therefore, investors should invest in the companies that are in the business of lending money. In contrast, rising interest rates tend to hurt growth stocks, such as tech start-up companies. Therefore, investors should avoid investing in these companies, particularly during the interest rate rise.
In general, in uncertain markets, investors should buy stocks of stable companies, such as commodities or even older and well established tech companies. These companies usually pay dividends, which insure some growth even if stock values decrease.
In conclusion we must illustrate that the interest rate rise by most Central Banks around the world are important element, but it isn’t the only element that impacts stock market returns. That’s why the most financial advisors recommend most investors to hold diversified portfolios of large index funds.