Higher Interest Rates Don’t Have to Mean Lower Stock Prices | Capital Group


Midyear Outlook

Higher Interest Rates Don’t Have to Mean Lower Stock Prices

U.S. Equities May Have Room to Rise After Tightening Begins, but Selectivity Is Essential

S&P 500 Price Changes Before and After the Start of Fed Tightening Cycles

Chart shows forward S&P 500 performance prior to and following Fed rate hikes

Sources: Standard & Poor’s, Federal Reserve. Data from published sources calculated internally by Capital Group. S&P 500 price indexed to 100 at the start of Fed funds rate tightening over 13 previous cycles. Current cycle data through May 31, 2015. Standard & Poor’s 500 Composite Index℠ and S&P 500® are service/trademarks owned by The McGraw-Hill Companies, Inc. 

History suggests that tighter monetary policy is not necessarily bad for equity investors. During the 13 Fed-tightening cycles since 1954, the stock market recorded an average gain of 9.3% 12 months after an initial rate hike. The increases didn’t stop there; 24 months following an initial rate hike, equities had registered an average gain of 15.3%.

To be sure, different areas of the market are likely to react differently as rates rise. For example, our research shows that materials companies and many areas of the consumer discretionary sector tend to lag the broader market after the start of rate hikes. Health care companies have tended to outpace the market.

Given that the current market upcycle is the third-longest since 1900 and valuations for some types of companies are relatively high, selective investing will be key going forward.

Companies in the health care and consumer staples sector have tended to do well in a rising-rate environment. Among these are pharmaceutical and biotechnology companies, like BioMarin Pharmaceutical, which has a diversified pipeline of therapies for rare diseases and life-threatening conditions, and Amgen, whose drugs include therapies for cancer and osteoporosis.

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