cd's going up due to stock market drop?

Question

since the dow has taken such a tumble lately (and assuming here it continues its slide), can it be assumed that the rates on certificates of deposits, money markets etc with go up?

Answer 1

No.

The rates on money markets and CDs are more closely tied to the fed funds rate. The fed funds rate is adjusted based on the fed's perception of economic growth and inflation. The sliding market is probably indicative of slowing economic growth, which would more likely cause the fed to cut rates to stimulate economic growth. If that were to happen, then the rates on money markets and CDs would go down, not up.

It could, however, push the prices of outstanding bonds up (and the yields down) as investors move into bonds to escape the volatility of the stock market.

Answer 2

In general a flood of money leaving the stock market would cause rates on debt instruments to go down.

Supply and demand. That flow of money is going somewhere.

Answer 3

No, stocks are correlated with cd's, treasuries and other similar debt instruments, but the correlation is assymetric, cd's, treasuries, etc are not correlated with stock movements. People rarely use "asymmetric monotonic," correlational tests but they do exist. An increase in rates will tend to decrease stock prices, likewise a decrease in rates will tend to increase stock prices. The reverse is not true. A decrease in stock prices does not lower interest rates and an increase in stock prices does not increase interest rates.

Debt instruments are tied to the money supply and inflation is a function of the money supply. Interest rates tend to be a function of inflation. Stock prices should be, though they not always are, a function of future expected earnings.