How Markets Actually Perform After Interest Rates Rise
Here is one of the most important things I have learned about investing.
The more emotion you bring to your investment decisions, the worse those decisions tend to be. Not sometimes. Almost always. Emotion and investing are a terrible combination, and the reason is simple. When you are emotional about money, you are reacting to how things feel right now instead of what the data actually shows over time.
And nothing triggers more investor emotion than the Federal Reserve raising interest rates.
When the Fed hikes rates, the reaction is almost automatic. People panic. They assume the market is about to fall apart. They start moving money around, second-guessing their portfolios, and making decisions based on fear of what might happen. The headlines do not help. Every rate hike comes with a wave of coverage that makes it sound like the economy is on the edge of a cliff.
But here is the thing about emotions. They are terrible forecasters.
History, on the other hand, is actually pretty useful. And when you look at what the data shows about how markets perform after rate hikes, the story is very different from what most people expect.
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โWhat Actually Happens to Stocks
Take a look at this first chart.
This shows the percentage of historical rate hike cycles where stocks were higher at 90 days, 6 months, and 1 year after the first hike. The short-term picture is mixed. Stocks only rose 25% of the time in the 90 days immediately following the first rate hike. That is the window where the panic is loudest and the emotional reaction is strongest. That early volatility is real.
But then look at what happens as time passes.
At 6 months out, stocks rose 75% of the time. At 1 year out, stocks rose 63% of the time. The further you get from the initial hike, the more the odds flip back in favor of the patient investor.
This is what most people never see because they make their decisions in the 90-day window when everything feels most uncertain. They sell into the volatility, lock in the loss, and miss the recovery that history suggests is more likely than not.
The emotional investor experiences the worst of it and none of the upside. The patient investor experiences both, which over time means a very different outcome.
What Happens to Bonds
The bond picture is a little different and worth understanding clearly.
As defined by 10-year US Treasuries, longer-term bond yields generally continued rising after the first hike, which means bond prices generally declined. The median change in yields at 90 days was 0.21%, climbing to 0.64% at 6 months and reaching 1.02% at one year. And in some historical cycles the increases were dramatically larger, with the biggest yield jumps hitting 1.51%, 1.46%, and 2.56% at those same intervals.
This is the mechanic we talked about in a recent newsletter. When yields rise, bond prices fall. So if you own a long-duration bond fund and rates are climbing, expect pressure on that side of your portfolio.
This third chart reinforces exactly that. Bond yields rose in 75% of historical cases at both 90 days and 6 months following the first rate hike. At the one-year mark that number jumped to 88%. In other words, rising bond yields after a rate hike are not the exception. They are the strong historical norm.
If you are holding a total bond market fund like BND, this is useful context. Short-duration bonds are less sensitive to rate changes than long-duration ones, which is why understanding what you own matters in this environment.
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โWhat This Means For Your Portfolio Right Now
The key insight from all three of these charts is the same one it always is. The short-term reaction to a rate hike is noisy and unpredictable. The longer-term picture looks much more favorable for patient investors who stay invested and do not make emotional decisions based on a 90-day window.
A few things worth keeping in mind.
Your high-yield savings account rate going up is a direct benefit if you are holding cash. You are finally earning a real return on money that used to sit there doing nothing.
Your credit card interest rate going up is a direct cost if you are carrying a balance. This is one of the best times to make paying off high-interest debt a priority, because that rate is only moving in one direction right now.
Your mortgage rate going higher matters if you are in the market to buy. If you already own and you are locked into a fixed rate, this does not affect you at all.
And your stock portfolio should largely be left alone. The data is pretty clear that the investors who stay invested through rate hike cycles come out ahead of the ones who panic and retreat to the sidelines.
The Federal Reserve raising rates is not a signal to blow up your financial plan. It is a signal to understand what the data actually shows and make sure your emotions are not running the show.
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