What Happens To Stocks When Interest Rates Go Up?

One of the greatest fears today is the coming rise in interest rates. The concern is that when rates rise, not only will bond prices fall, but rising rates will also undermine equities, driving stock prices down.

All other things held constant, an increase in interest rates should reduce stock prices. This occurs because the present discounted value of future dividends falls in direct conjunction with rising interest rates. But of course, all other things are never held constant. As a general rule, when interest rates are rising most rapidly during an economic expansion, this also corresponds with significant economic growth and increasing corporate profits and generally occurs in the middle of economic expansion phases (as opposed to at their end). Thus, although stock prices are hurt by the higher interest rates through the adverse discounting process, the favorable economic growth and increased per share earnings have, on average, more than offset this negative effect.

Source:  Rob Brown, FinancialAdvisor.com

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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