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09 June, 2017

When Rates Go Up, Do Stocks Go Down

It is very tempting to think that there are large scale detectable patterns and predictable behaviours built in to stock market movements, and that with care and attention you can gain an advantage.  One such oft assumed pattern is that when interest rates rise stock markets will fall - at least in the short term.

It's a tempting idea, with the rationale that if rates are rising, then borrowing will get more expensive, and economies will slow, thus affecting the performance of companies and consequently their share price.  Sadly, like so many other attractive ideas, the reality is more complex and the evidence to support the supposition is weak. 

We present here an accessible piece of research from Dimensional Fund Advisers that shows that far from being able to rely on the direction of stocks in the month after a rate rise, instead there is little difference in how markets react as compared to any other month. 

Mostly markets go up, and sometimes they go down.  Trying to time the markets is not the secret of success, instead long term exposure to a diversified portfolio is the only reliable way to invest.

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by John Stirling

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