This is probably a simple concept for a lot of people on here. But for those who don't understand the relationship between interest rates and equity prices, this is a very valuable and quick lesson to understand. When the Fed raises interest rates, stock prices tend to decrease, as we are seeing right now. There are several reasons for this, the main of which I have summarised below. Borrowing costs When interest rates rise, the cost of borrowing surges meaning companies have less capital to invest and expand. If a baker is paying 10% interest on his loans all of a sudden, that’s a lot less dough to play with… This slows down profit growth, which ultimately constrains stock prices. Safer investments Government bonds are considered safer than shares in companies which can go bankrupt. That’s why bonds aren’t known for bountiful yields because they are considered to be a safe house for investment. But when rates do climb, they become irresistible to investors who sell some stocks in pursuit of more secure returns. I mean who doesn't want to lend money to a group of people who can't even agree on a budget…? Less spending When interest rates are low, consumers take out credit cards and swipe left and right like they’re on Tinder. When rates rise, people have less disposable income as their mortgage payments increase, and cheap credit becomes lacking. This reduces sales and the overall economy's growth, reducing company profits and stock prices. Moral of the story? Don't fight the fed. Humble shill time – this is an extract from my post recently in The Gambit. This post explains why rates are used to tackle inflation and how they influence the price of stocks and crypto. If you want to check it out, please click here. submitted by /u/market_chimp [comments]
