The panic has already started…
Right now, financial headlines are spreading fears of a collapse in the stock market.
You see, the US Federal Reserve has started to raise interest rates. This has led to some commentators saying that rising rates will cause a crash in the stock market.
But does history support this view?
I know interest rates aren’t the most exciting topic to most readers. But understanding what it means for the stock market can put you ahead of 99% of the crowd.
People who say that a rise in interest rates will “crash” the stock market have simply NOT been paying attention to history.
Let’s take a look at how stock prices have REALLY reacted to rising interest rates in the past. Take a look at this chart of how the stock market (the S&P 500) reacted the last time the Fed raised rates:
You do not see a crash.
Instead you see that the stock market continued to go higher despite rising rates.
In fact, take a look at this detailed table below which shows how stocks have performed during periods of rising rates:
We can see that, contrary to popular opinion, the stock market saw an average annualised gain of 12% during periods of rising rates (or rising bond yields).
In conclusion: stock prices continued to rise higher each time interest rates were raised after a period of falling or steady rates.
History shows us that the folks who are saying that rising rates will cause the stock market to collapse are simply wrong.
Rising rates will not stall or collapse the stock market.
By the way, in case you’re wondering about the real estate market – here’s a case in point from history:
In the UK, the last time the Bank of England raised interest rates in 2003 after a period of falling rates, house prices rose from an average of £100,000 to £180,000 by 2007 – that is an 80% increase in 4 years!
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