skip to navigation skip to content

Hiking (of interest rates) can damage your wealth


Historical analysis of 21 countries over the past 116 years shows real equity and bond returns higher after interest rate cut than rate rise, says study co-authored by Professor Elroy Dimson of Cambridge Judge Business School, published by Credit Suisse.

Young boy in a business suit with telescope. Small child wearing a full suit and holding a telescope. He is holding the telescope up to his eye. Business forecasting, innovation, leadership and planning concept. Shot outdoors with trees and grass in the background

A historical analysis of 21 countries over the past 116 years (1900-2015) shows that real equity and bond returns tend to be higher following an interest rate fall than after a rate rise, according to a study co-authored by Professor Elroy Dimson of Cambridge Judge Business School.

The study published today by bank Credit Suisse also found, based on more than a century of evidence on US interest rates (85 years for the UK), that the announcement-day impact on equity and bond returns is typically small, and especially for rate changes that are well-signalled in advance in policy terms.

These historical trends are important to understand for young people in investment and finance, says Professor Dimson, chairman of the Newton Centre for Endowment Asset Management at Cambridge Judge Business School and Professor Emeritus at London Business School.

“Until late last year, no American or British investment professionals in their 20s (and only a few in their early 30s) had experienced a rise in their domestic interest rate during their working lives,” he said. “Without personal experience to draw on, it is essential to take a longer-term perspective. We hope that our historical focus will help investors to interpret interest rate changes, if and when they happen, and to construct portfolios that have resilience over the long term.”

The research by Professor Dimson and by Professor Paul Marsh and Dr Mike Staunton of London Business School is contained in the Credit Suisse Global Investment Returns Yearbook 2016, published in collaboration with London Business School, which analyses 70,000 days of financial market history and 2,400 country-years of data across 21 countries.

The study also compares the investment performance of trading strategies over interest-rate hiking and easing cycles. Across a broad set of asset classes – including equities, bonds, currencies, real estate, precious metals and collectibles – the findings point to substantial differences between returns during hiking and easing cycles.

Historically, in fact, no asset class has offered contra-cyclical returns in relation to interest rate changes.

The Yearbook notes that 16 December 2015 “marked the reversal of the trend that had dominated financial markets for almost a decade: the Federal Reserve finally increased rates. And yet, although the rate hike was widely anticipated in magnitude and timing, markets, which had previously proven surprisingly resilient, saw a period of sharp declines and volatility in subsequent weeks.”

This level of investor uncertainty “is hardly surprising” given that market participants had not dealt with rising rates in the US and the UK for a considerable amount of time, the report says, so historical asset prices detailed in the study can be helpful in such a context.