Here's what happened to shares the last time the RBA raised rates

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There is an old saying that the stock market rises in stairs and falls in elevators and prior to this week the All Ordinaries Index was certainly rising in stairs, however, the RBA's announcement of a 0.5% rate rise on Tuesday changed all that.

The market has fallen around 2.5% since the RBA announcement until the close on Thursday and is now looking weak. Given the prospect of further interest rate rises, investors are now questioning how the Australian stock market will react moving forward and whether it will continue to fall away or turn and start to rise once again.

To understand where the Australian stock market may be heading, it pays to look at previous periods where interest rates have risen.

when did interest rates last increase this much

The most recent interest rate rise was out of the GFC low in October 2009 when the RBA announced four rate rises over a period of 12 months. As a consequence, the All Ordinaries Index fell by around 14% in the first six months before rising over the next six months to be slightly above where it started in October 2009.

Going back further in time, from May 2002 the RBA raised rates 12 consecutive times up to March 2008. During that time, the All Ordinaries Index fell around 20% from May 2002 to a low in March 2003 before our market experienced one of the longest bull markets we have ever experienced. Even if we look back to 1998 or prior to this period when interest rates rose, we get the same sort of patterns unfolding whereby the market either trades sideways or down for a short period of time before rising in a strong bullish trend.

So, to answer the question as to whether investors should be concerned about the stock market moving forward, history tells us while there may be some short term weakness, we will be rewarded with a solid bull run once we get through this current period of uncertainty.

The best and worst performing sectors this week

The best performing sectors include Energy up more than 6% followed by Utilities up more than 1% and Healthcare, which is just in the green. The worst performing sectors include Financials down more than seven following the RBA announcement this week. Information technology is also down more than 3% while Consumer Discretionary is down more than 2%.

The best performers in the S&P/ASX top 100 stocks include Atlas Arteria up more than 13% followed by WDS up more than 11% and Tabcorp Holdings up more than 7%. The worst performing stocks include Magellan Financial down more than 14% followed by Westpac and Bendigo Adelaide bank down more than 11%, while CBA and NAB are down more than 9%.

What's next for the Australian stock market

What a difference a week can make in the market given that the All Ordinaries Index is down more than 3% so far this week following the RBA's decision to raise interest rates. While I was indicating that the Australian market was unfolding in what appeared to be the start of a new bullish phase last week, the volatility this week is exactly why I have been telling investors to be cautious before buying any new stocks.

Over the past 12 months, the Australian stock market has been very volatile with large swings in price in both directions and is now sitting below the level where it was a year ago, which is making it hard for investors to achieve good returns. It now remains to be seen whether the interest rate rise will drive our market lower or whether it will continue its sideways pattern.

Right now, the market has pulled back to test the recent low on May 12 at 7157 points and if it holds above this low and turns to rise, we are likely to see a bullish market in the third quarter of 2022. If it falls below the May 12 low, it could fall for a short period down to around 6600 points or slightly below this level. Given this, I continue to urge investors to exercise patience and caution because as we experienced this week, the mood in our market can change quickly.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.