The Federal Reserve typically hikes interest rates to obviate an overheating economy during the later stages of an economic cycle, typically foreshadowing the eventual end of a bull market. Nevertheless, the equities market and stock exchange traded funds may still have more room to run before that end.
“As rising rates have affected U.S. equities recently, there is still hope for the asset class. Equities have gained significantly in periods of rising rates,” Jodie Gunzberg, Managing Director, head of U.S. equities at S&P Dow Jones Indices, said in a note.
The S&P 500 Index, along with related funds including the SPDR S&P 500 ETF (NYSEARCA: SPY), iShares Core S&P 500 ETF (NYSEARCA: IVV) and Vanguard 500 Index (NYSEARCA: VOO), have increased 2.4% so far this year and gained 18.5% over the past year.
While there are some concerned about a slowdown in equities as rates rise, the stock markets have historically plodded ahead during periods monetary tightening. Since 1971, the S&P 500 has increased about 20% on average in rising rate periods, according to S&P Dow Jones Indices data. Furthermore, the S&P 500 has generated positive returns eight of nine times since 1971 and even jumped nearly 40% twice, with less than a 4% loss for its worst rising rate period.
During periods of accelerating growth and inflation, such as what we are experiencing now, rising rates could translate into appreciating assets.