When you look at rising interest rates, you need to distinguish what is the driver behind it because it can change the market outcomes. When interest rates rise due to growth expectations, you have a positive outcome for the stock market.
That’s because earnings expectations improve and investors tolerate higher rates because they anticipate stronger performance. One recent example of that is the 2016-2018 period when the stock market rallied despite the increase in interest rates. That was when we had Trump’s tax cuts and inflation wasn’t a problem.
When interest rates rise due to inflation expectations, you generally have a negative outcome for the stock market. That’s because returns start to get revised downwards and you have the spectre of monetary tightening. The most recent example is the 2022 period when the Fed had to tighten policy fast to bring inflation down.
So, the context matters a lot. Rising rates aren’t inherently bad for stocks. It depends on why they’re rising. Markets tend to embrace growth-driven rate increases but fear inflation-driven ones.
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