How do interest rates affect the stock market?

Answer 1

Three general ideas come to mind when interest rates change.

First, what if I (and a pile of other stockholders) had bought a stock because of its dividend. The price of my stock will possibly be affected to rise or lower the yield of my anticipated dividend.

Second, what if my company is up to their eyeballs in debt and some is coming due? Or what if they are about to borrow a bunch of money to build a new factory or refinance old debt that is coming due but they can't retire it all--higher rates just added to the burden and my stock is likely to sink, lower rates just made things easier on the company costs and my stock is likely to rise.

Third, what is that interest rate going to do to the customer base? Will it make it harder for customers who might need to borrow money to pay for their product? Or will it become easier? Tight money around Christmas time will knock the props out of a lot of retailer's stocks. Loose money (lower interest rates) will bouy sales and all will be well with the world.

Answer 2

Interest rates are what a company pays on its borrowing so the direct effect of raising interest rates is to raise the costs of doing business. The investor compares the rate of return he/she can get from debt i.e. bonds, CDs, savings accounts with very low risk and the potential returns of owning stock in a company - which is riskier. Therefore high interest rates are negative for stock markets because it raises the cost of business and provides savers with a more attractive alternative.

However, the TREND of interest rate changes is actually more important - because investing is about looking forward. Therefore, FALLING rates are considered good for stock market bulls and RISING interest rates are considered bad.

Answer 3

The purpose of owning stock, presumably, is to share in the corporate profits. Therefore, owning stock is less desirable if some of those profits will be spent on interest expense than on dividends or retained earnings. Another issue, is that investors will seek to maximize their earnings. As interest rates rise, stock ownership becomes less desirable, while bonds, cd's, etc. become more desirable.

Answer 4

Most companies have some floating rate debt. When int rates go up, it comes straight out of profits, so most people don't like to own stock in a period of rising interest rates.