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How would a rise in rates shake the markets?

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Globe editors have posted this research report with permission of  S&P Dow Jones Indices. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:

Conventional wisdom tells us that rising interest rates are anathema to stocks.

The data for the past two decades are not consistent with the entire history of the past 60 years. The longer data set tells us that stocks do best when rates fall the most, and vice versa. But this does not seem to be reflected in recent years.

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To what degree should the prospect of Federal Reserve tapering unsettle equity investors? The evidence does not allow a definitive answer. There are good reasons to believe that the prospective increase in interest rates will be bad for the stock market, and there are good reasons to believe the opposite. If it is true that interest rates and stock prices can both be driven by the same set of exogenous economic variables, it's arguable that the variables that will lead the Fed to increase rates will also support higher equity prices.

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