In a blog post earlier this year, I discussed how lower interest rates are often supportive for equity markets. Since then, both the Australian sharemarket, and US Dow Jones index, have bounced back considerably off the respective lows in February this year. 

Now, we face the prospect of the US Federal Reserve increasing rates, with commentary suggesting a strong likelihood of an increase later this year, most likely in December.

Why is there a need for an interest rate increase? 

The US local labour market and inflation data supports the need for a rate hike. Until now, while economic growth in the US has continued to improve, it has not been enough to convince the majority of Federal Reserve members to raise rates for a second time since the global financial crisis. 

Impact on the US and global equity markets

A rate rise is an indicator the economy is continuing to strenthen therefore, this will be positive for the US economy over the long-term.

However, US interest rate decisions can result in global sharemarket volatility in the short-term, and put selling pressure on sharemarkets. This is because, in instances of rising interest rate environments, money often flows out of equity markets and into interest bearing securities. 

How will a rate rise affect clients of Hewison Private Wealth?  

At Hewison Private Wealth, we always keep a finger on the pulse of what’s happening in the market. However, we look long term when making individual investment decisions. 

Our clients can rest assurred that a possible sharemarket sell-off is an example of a ‘short-term’ event. We will continue to ensure clients’ portfolios are positioned for the long-term, and manage them according to a long-term investment strategy that aligns to their overall objectives.  

The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser