The study, which analysed 468 months of US equity market performance between 1983 and 2021, found markets were generally positive in months with rate rises, indicating said rates had little impact on monthly performance.
These findings come days after the Federal Reserve increased the funds rate by 75bps and the Bank of England upped the base rate to 1.25%, up from 1%.
In high interest rate environments, investors tend to worry valuations will decrease and have a knock-on impact on returns.
Dimensional’s analysis of the Fama/French Total US Market Research Index and changes to the Federal funds’ target over 38 years, revealed that on average, returns in months with rate rises were similar to those with decreases or with no change.
How to understand interest rates in a ‘real’ way
Returns were up, on average, at 1.1% when the target rate increased, compared to returns of 1.2% when rates decreased, and 1% in months with no target rate change.
In months following rate hikes, Dimensional found that over one, three, and five-year periods annualised US equity market returns remained strong despite Federal Reserve rate activity.
“With a number of Federal Open Market Committee meetings remaining in 2022, the Fed’s signals and actions will continue to be closely watched by the market. As the Fed often signals its agenda in advance, we believe market participants are already incorporating this information into market prices,” the report said.
“…our research indicates that US equity markets offer positive returns on average following rate hikes. Thus, reducing equity allocations in anticipation of, or in reaction to, Fed funds rate increases is unlikely to lead to better investment outcomes.”