Stocks Don't Rise or Fall Because of Interest Rates
The idea that the two move in opposite directions is grounded more in theory than data.
Don’t assume the Fed’s plan to raise rates is bad for the stock market.
Photographer: Michael Nagle/Bloomberg
With the Federal Reserve poised to raise short-term interest rates to fight inflation, more than a few investors worry that higher rates will sink stocks. But there’s just as much reason to think the opposite will happen.
The endlessly repeated idea that interest rates and stock prices move in opposite directions is grounded more in theory than data. The theory is that stock prices reflect the present value of companies’ future earnings, dividends or cash flows, a calculation that requires an interest rate to “discount” future dollars to the present. The higher the interest rate, the less future money is worth today, and vice versa. Therefore, rates go up and stock prices go down.