Analysis on how the recent interest rate hikes by the central banks have affected stock performance

Abstract

This study examines the effect of the interest hikes on stock performance during 2019-2024. These years are characterized by two major scenarios: COVID-19 crisis and the Ukraine conflict. The pandemic led to substantial money printing, whilst the Ukraine conflict caused a spike in inflation. The high inflation in 2022 coupled with the effects of money printing prompted centrals banks like the European Central Bank to increase the interest rates. To conduct this study, a sample of 92 stocks listed on STOXX Europe 600 were chosen and then analysed using the Sharpe ratio, Treynor ratio and Jensen’s alpha for the years 2019-2024. The 92 stocks were sub-divided into two sub-samples: 46 financial and 46 non-financial stocks. The analysis compares their performance before, during, and after the recent interest rate hikes implemented by central banks. Financial stocks in the study primarily consist of banking equities, with a few other financial firms. The non-financial stocks are drawn from the consumer staples and healthcare sectors. The findings reveal that stock volatility was highest during 2020-2021 and during 2022-2024. Consumer staples and healthcare registered consistently strong performance because they are viewed as essential goods and services which cannot be forgone. In contrast, financial stocks, while experiencing greater standard deviations and extreme shifts in the yardsticks, demonstrated stronger total returns following the interest rate hikes. The results conclude that the interest rate hikes have had a notable impact on all stocks, particularly the financial ones. This research contributes to existing academic literature by clarifying how the recent interest rate hikes have influenced stock performance. Future research should consider a more representative analysis by taking a longer sampling period and including stock data from other regions of the world.