Knowledge Centre

In theory, rising interest rates spell trouble for stocks, but history confirms that equity market returns have varied significantly following an initial central bank rate hike.

Dramatic and sudden declines in stock markets are both rare and painful initially. Many times, they are the final straw for quite a few investors who decide it is time to throw in the towel and head for the sidelines.

Needless to say, 2022 has not been as fruitful for investors as the previous 18 months that followed the outbreak of COVID-19. Extremely low interest rates, combined with stimulative fiscal and monetary policies resulted in an extremely rewarding period for equity investors, especially in higher risk, growth oriented investments.

The biggest threat bonds face is an increase in interest rates, and they will rise eventually. The wake-up call for bond investors could come when investors realize how little money they are earning with low yielding bond portfolios.

Historically there has been a strong inverse relationship between interest rates and stock prices. Specifically, whenever interest rates rise, stock prices eventually fall and investors become worried that a rate hike is long overdue.

Stock markets around the world have been getting choppy lately; raising the question, is now the time to panic? Investors understand that market fluctuations are a part of investing but they are nevertheless scary.

Alarm bells have been ringing across trading desks as the Federal Reserve indicated that it would slow down its policy support.

2021 was certainly an eventful year to say the least. Investors were faced with a barrage of negative headlines throughout the year resulting in increased volatility across global markets.

When investing in capital markets, investors have a wide array of choices. The primary task facing investors is choosing between bonds, stocks, or a mix of both.

Interest rates could be on the rise in Canada next year as the Bank of Canada reverses its long term policy of stimulating the economy to offset the debilitating impact of COVID-19. The general consensus is that sometime during 2022 short term interest rates will be going up.