Impact of Rising Interest Rates on the Market

There is an old saying that the stock market rises in stairs and falls in elevators and prior to this week the All Ordinaries Index was certainly rising in stairs, however, the announcement by the RBA of the 0.5 per cent rate rise on Tuesday changed all that. The market has fallen around 2.5 per cent sine the RBA announcement until the close on Thursday and is now looking weak. Given the prospect of further interest rate rises, investors are now questioning how the Australian stock market will react moving forward and whether it will continue to fall away or turn and start to rise once again.

How has the stock market unfolded historically when interest rates rise?

To understand where the Australian stock market may be heading, it pays to look at previous periods where interest rates have risen. The most recent time in history that we experienced an interest rate rise was out of the GFC low in October 2009 when the RBA announced four rate rises over a period of 12 months. As a consequence, the All Ordinaries Index fell by around 14 per cent in the first six months before rising over the next six months to be slightly above to where it started in October 2009.

Going back further in time, from May 2002 the RBA raised rates 12 consecutive times up to March 2008. During that time, the All Ordinaries Index fell around 20 per cent from May 2002 into a low in March 2003 before our market experienced one of the longest bull markets we have ever experienced. Even if we look back to 1998 or prior to this period when interest rates rose, we get the same sort of patterns unfolding whereby the market either trades sideways or down for a short period of time before rising in a strong bullish trend.

So, to answer the question as to whether investors should be concerned about the stock market moving forward, history tells us while there may be some short term weakness, we will be rewarded with a solid bull run once we get through this current period of uncertainty.

What were the best and worst performing sectors last week? 

The best performing sectors included Energy up 4.97 per cent followed by Utilities up 0.46 per cent and Healthcare, which is down 0.17 per cent. The worst performing sectors included Financials down 9.01 following the RBA interest rate announcement last week. Information technology was also down 4.81 per cent while Consumer Discretionary was down 4.45 per cent.

The best performers in the S&P/ASX top 100 stocks included Atlas Arteria up 13.04 per cent followed by WDS up 9.50 per cent and Tabcorp Holdings up 7.98 per cent. The worst performing stocks included Magellan Financial down 17.75 per cent followed by Westpac down 13.12 percent while Bendigo Adelaide bank and CBA were down 12.64 per cent and 10.86 per cent respectively.

What's next for the Australian stock market? 

What a difference a week can make in the stock market given that prior to last week the All Ordinaries Index was looking a little stronger, however, it ended the week down over 4 per cent after the RBA made the decision to raise interest rates. While I have previously indicated that the Australian market has been unfolding in what appeared to be the start of a new bullish phase, the bearish volatility last week is exactly why I have been telling investors to be cautious before buying any new stocks.

Over the past 12 months, the Australian stock market has been very volatile with large swings in price in both directions and is now sitting below the level where it was a year ago, which is making it hard for investors to achieve good returns. It now remains to be seen whether the interest rate rise will drive our market lower or whether it will continue its sideways pattern. 

Right now, the market has fallen below the recent low on 12 May at 7,157 points, which indicates further falls are likely. It is possible that the fall will only last for one to three weeks and to around 6,600 points or slightly below this level. I am also confident that we can expect a more bullish market in the third quarter of 2022. Given the currently volatility, I continue to urge investors to exercise patience and caution because as we experienced last week, the mood in our market can change quickly. 

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.