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I don’t fully understand why, but in general stocks tend to fall when interest rates rise. Investopedia chalks much of it up to psychology and… higher rates me

by cj 5y ago

I don’t fully understand why, but in general stocks tend to fall when interest rates rise. Investopedia chalks much of it up to psychology and… higher rates means less lending means less spending means less earnings. https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/#impact-of-expectations https://www.investopedia.com/investing/how-interest-rates-af...

whimsicalism 5y ago
> stocks tend to fall when interest rates rise. unexpectedly* stocks tend to fall when interest rates rise unexpectedly. many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in.
- dragonwriter 5y ago
  > many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in. Right, but that just means more than 100% of the fall due to the rate increase occurred earlier when it was anticipated, so the rate increase still caused the fall, in effect.
  - whimsicalism 5y ago
    The expectation caused the fall. It's possible to even have an expectation of a rate increase and then not have any at all.
deleted 5y ago
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jliptzin 5y ago
Look at the formula for discounted cash flow. It's a widely used valuation model and applies to lots of companies, especially those in the growth phase where current market cap is largely dependent on expected cash flow far into the future. https://en.wikipedia.org/wiki/Discounted_cash_flow https://en.wikipedia.org/wiki/Discounted_cash_flow Notice the denominator in the series - (1+r)^n where r = interest rates and n = number of years out. The more r rises, the more terms at the end of the series drop out because they're so close to zero. So that effectively means a company that's getting its value from cash flow 10+ years from now loses a lot of its value if interest rates are rising.
EVa5I7bHFq9mnYK 5y ago
Because investment in stocks competes with investment in government bonds. At just 1% increase in bond interest, trillions of investment dollar will flow from stocks to bonds. Many people, especially retired, would prefer a safe 2% return over 7% return with occasional 50% crash (as in 2000 and 2008).

by cj 5y ago

whimsicalism 5y ago

> stocks tend to fall when interest rates rise. unexpectedly* stocks tend to fall when interest rates rise unexpectedly. many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in.

dragonwriter 5y ago
> many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in. Right, but that just means more than 100% of the fall due to the rate increase occurred earlier when it was anticipated, so the rate increase still caused the fall, in effect.
- whimsicalism 5y ago
  The expectation caused the fall. It's possible to even have an expectation of a rate increase and then not have any at all.

deleted 5y ago

[deleted]

jliptzin 5y ago

Look at the formula for discounted cash flow. It's a widely used valuation model and applies to lots of companies, especially those in the growth phase where current market cap is largely dependent on expected cash flow far into the future. https://en.wikipedia.org/wiki/Discounted_cash_flow https://en.wikipedia.org/wiki/Discounted_cash_flow Notice the denominator in the series - (1+r)^n where r = interest rates and n = number of years out. The more r rises, the more terms at the end of the series drop out because they're so close to zero. So that effectively means a company that's getting its value from cash flow 10+ years from now loses a lot of its value if interest rates are rising.

EVa5I7bHFq9mnYK 5y ago

Because investment in stocks competes with investment in government bonds. At just 1% increase in bond interest, trillions of investment dollar will flow from stocks to bonds. Many people, especially retired, would prefer a safe 2% return over 7% return with occasional 50% crash (as in 2000 and 2008).