How Did Stocks Perform Last Time The Fed Raised Rates?


Janet Yellen is the most powerful person in the markets right now. In the current low-rate environment where money is chasing anything with yield, the market’s most looked forward to event is when the Fed will begin raising its target rate again. Now currently set in the range of 0.00% – 0.25%, the market has not seen a Fed Fund rate increase in over 10 years.

While there is much consternation over when the eventual rate increase will occur, we are much more interested in what happened last time the Fed began a cycle of raising rates. The cycle began on 30 June 2004 and finished on 30 June 2006. During this time the rate was increased 17 consecutive times, from 1.00% to 5.25%, after which the rate was stable for over a year.

So what happened to stocks and equities the last time the Fed raised rates?

We first looked at how developed markets performed during the period of 30 June 2004 to 30 June 2006. Then we looked at the performance of emerging markets today, using them as a partial proxy for frontier markets today since 10 years ago they were in an early developing stage. Finally we looked at frontier markets that were in operation back then and that we could find data for.

Developed Markets

S&P 500 Euro Stoxx 50 FTSE 100 Nikkei 225 Gold Oil (Brent)
30-Jun-04 1,140.84 2,811.08 4,464.10 11,858.87 394.25 34.50
30-Jun-06 1,270.20 3,648.92 5,833.40 15,505.18 615.85 73.51
Gain/Loss 11.3% 29.8% 30.7% 30.7% 56.2% 113.1%

While equities, gold, and oil all gained during this time, the S&P 500 was actually the worst performing market while oil rocketed higher:


Emerging Markets

MSCI EM Brazil Bovespa Russia Micex India Sensex China Shanghai South Africa FTSE/JSE
30-Jun-04 432.20 21,148.91 534.84 4,795.46 1,399.16 9,200.62
30-Jun-06 747.54 36,630.66 1,331.39 10,609.25 1,672.21 19,538.32
Gain/Loss 73.0% 73.2% 148.9% 121.2% 19.5% 112.4%

With the exception of China, Emerging Markets had some of its best performance in this two year period. It is interesting to note that both Russia (an oil exporter) and India (an oil importer) outperformed so well.


Frontier Markets

MSCI FM Chile IPSA Ukraine PFTS Pakistan KSE100 Nigeria All-Shares Dubai General
30-Jun-04 419.78 1,482.98 135.66 5,279.18 28,887.41 1,492.75
30-Jun-06 683.70 2,126.02 380.24 9,989.41 26,161.15 4,276.58
Gain/Loss 62.9% 43.4% 180.3% 89.2% -9.4% 186.5%

We selected a single frontier market from each continent and as expected of frontier markets, the results were all over the place. On average they underperformed versus the BRICS, but it should be kept in mind that given these markets are still considered frontier markets today, they were out on the fringe ten years ago. This means that they were even less likely to have been impacted by global market conditions than they are now, and the lack of correlation to other markets seems to support that theory.



Stocks/equities performed very well last time the Fed began its rate hiking cycle, but Emerging Market equities were the clear winner. While we are not assuming that history will automatically repeat itself this time around, it is worth taking a second look at early emerging and more developed frontier markets.

 If there is interest, it may be worth taking a closer look at frontier markets on a continent-by-continent basis to see if there are any trends.





Leave a Reply