Quick Bite | What happens to equities once rates peak?
July 18th, 2023 | Article
By: Paul Zwi
Most financial and economic commentators agree that we are getting close to a peak in interest rates. Because inflation appears to have peaked for this cycle, and official interest rates have been hiked often and aggressively by most central banks in developed countries, the view that the need for further rate rises has diminished. If we are not quite there yet, we are probably close – perhaps one or two further rate rises before central banks can sit back and observe as inflation slowly retreats.
What does that mean for equity prices? The following chart shows the share market returns (capital appreciation, ignoring dividends) for the US benchmark index, the S&P 500, for the 12 months following the peak in the last 6 rate hiking cycles. The returns are mostly very strong, with only one exception, which occurred in May 2000 following the bursting of the Tech Bubble. On average, the S&P 500 price index rose by 19.7% in the 12 months following the rate peak.
Of course, we do not know when interest rates will peak until after the fact. Consensus expectations might be wrong – they often are. Inflation might be more persistent than expected. And this time, the markets might behave differently. Six examples is hardly a long and convincing sample set. And this is the US – Australia might behave differently. There could be a severe recession around the corner.
But I don’t think so. For what it’s worth (and it might not be much), my personal view is that interest rates are indeed very close to peaking, and that markets will respond positively when they do. I expect the next 12 to 18 months to be rewarding for long term shareholders.
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