why interest rate and stock market generaly move in opposite directions?

Answer 1

In olden days what you say might have been true. Now it need not be true since inflation is a sign of economy expanding especially when the job rate is high and there is high demand for products which creates the demand pull inflation. So investors nowadays get into the market knowing that the companies have a good market for their product out there. Raising interest rate is a contractionary policy by the Fed and this used to be the reason why there used to be a switch. Now the corporates comply and the effects of inflation is minimal and contractionary policies don't paly havoc as used to be. They call it smooth landing. Overdoing contractionary policies can sometimes drive the economy to recession. So they carefuly do this nowadays and there is no need to switch from stocks to bonds when interest rates are raised.

Answer 2

If interest rate goes up, people will expect their money to earn more as the result. Immediate reaction is to withdraw money from stock market and invest in cash. That is esp true if the market perceives that stock will not earn much more. Investing in stock market requires a certain "premium" above investing in cash market since the risk it carries in investing in stocks. Thus if interest rates goes up, the "premium" in stock market must go up for it to be equally attractive. If not, the smart investor will think that the return in investing in stocks doesnt justify the risk it carries and withdraw the money.
When interest rates go down, smart investor will now put their money back to stock market since the "risk premium" is now becoming more attractive. Thats why usually stock market generally moves in opposite direction to interest rates. At least in immediate term.

Answer 3

When the stock market goes down, people tend to seek safer harbors so to speak. They don't like losing money in the market so they pull thier money out and put it in fixed income investments like bonds and savings accounts.

Also.. if the Fed raises interest rates, some fixed income investments might lure people away from the market because of a better gauranteed return.

Answer 4

Interest rates and stock market prices sometimes move in the same direction

But to make it simple, equities are valued compared to investing in virtually risk-free government bonds (and hence interest rates) plus a risk premium for the individual company.

As interest rates rise, it deceases the present value of companies' future profits and so that, in theory, over the long run causes the stock market to go lower.

Answer 5

No all costs flow interior an identical direction. the fee of bonds and their fee of return (the pastime fee) DO flow in opposite instructions however. This relatively is clever, If I supply you a bond that pays $50 a year in pastime (the coupon value) and you pay me $1000 for the bond (in some years i'm going to offer you your funds back). Then the linked fee of return you will acquire is basically the coupon value divided via the fee: $50 / $1000 = .05 or 5% Now what if unexpectedly there's a transformation interior the economic device and charges of pastime drop - in line with danger the Federal Reserve has desperate to print funds and purchase bonds. this could push the fee of the bonds up so that they no longer yield 5% yet in line with danger yield basically 3%. observe how because of the fact the fee is going up, the yield is going down - value and yield flow in opposite instructions. there is in many circumstances a distinction made between economic enterprise costs of pastime (lending costs) and bond yields. case in point a economic enterprise pastime fee could be what a economic enterprise CD or mark downs account pays, the place bonds are issued via governments and firms. notwithstanding the two bond and economic enterprise costs of pastime flow mutually. in case you be attentive to which you would be able to get a undeniable pastime fee from a economic enterprise CD, you had greater valuable have the skill to get a minimum of that lots from any bond and you will basically pay as much because it takes to get that yield. Make any experience?

Answer 6

Simplisticly, interest rates serve as a variable in the discounting of cash flows which determine asset values. The higher the discount rate, the lower ther value of an asset, all thing being equal. Conversely, the lower the discount rate, the higher the asset value.

Answer 7

It impact on the availability of liquidity. secondly, cost of fund goes up. if you are investing on borrowing then you loose on that side. Thirdly, retail investor prefer to play safe by leaving more money in fixed earn income ie fixed deposit if rate of interest goes up.