A few clients recently made comments about rising interest rates and its potential effect on markets and their portfolio.
This is a good question as central bankers on both sides of the border have indicated that rate increases of up to 1% could happen next year. Interest rate increases are perceived to have potentially downward pressure on stock markets as dividend yields become less attractive and on real estate due to increased carrying costs.
To get some idea of how markets may react, lets look back at 17 previous years where inflation has been greater than 5% (US Figures) and the corresponding change in value of the S&P 500 during the same year.
https://awealthofcommonsense.com/2021/10/inflation-vs-stock-market-returns/
We can see that during the 17 years where inflation has been above 5%, markets increased during 12 of those 17 years (70.5% of years) with an average market gain of 18.36% and down for 5 years (29.5% of years) with an average loss during these years of 12.06%.
While looking back at history can be beneficial, we need to be careful. Financial markets have become far more intricate and there are far too many interrelated moving parts. Making financial choices based on the past can be risky and expensive.
Remember: “It’s tough to make predictions, especially about the future” – Yogi Berra
Best
Paul