Will Higher Interest Rates Demolish Equities?
It is commonly supposed that the higher interest rates currently being deployed by central banks to address inflation are very likely to depress share prices. US data suggests that inflation is the bigger danger.
For the period 1928 to 2021 annual returns show:
With rising inflation average returns sat at 5.6%
With falling inflation average returns sat at 14.7%
In contrast
With rising interest rates average returns sat at 9.7%
With falling interest rates average returns sat at 9.6%
Data: Ben Carlson drawing on US Securities data (Blog A Wealth of Common Sense)
There seems to be no discernible trend associated with interest rates whereas rising inflation seems to be worse news than falling inflation – at least for the US. A proximate explanation may be that inflation, being an across-the-board erosion in purchasing power, is difficult to escape whereas share prices being driven by numerous factors only one of which is the immediate cost of money (at least in the shorter term) exhibit a more muted response to interest rate rises.
Eye2theLongRun 