With The Fed continuing to increase interest rates it has shown an effect on stock prices. These companies, especially tech companies, run off credit. When interest rates increase, it slows investment and therefore slows the growth of these companies. In addition to companies slowing down borrowing, savers (or investors in finance terms) receive a higher rate of return through bonds. Many savers would rather receive the high rate of return on the bonds instead of taking chances on the stock market. With the large hikes in the federal funds rate, savers do not know when it will stop so many would rather put their money into something with a guaranteed return like a bond.
Looking at the stock prices as of November 27th, the S&P 500 is down .19%. NASDAQ is also down .07%. These are not huge changes although when your portfolio gets to a high amount, these drops could be considered detrimental. Although there is not a direct link to the federal funds rate and the stock prices, there is a trend, specifically a negative relationship. In times like these when the yield on a 6 month treasury bond is 5.466%, many savers are stepping away from the stock market to get these guaranteed returns.
CNBC. (n.d.). Check out 6 month US Treasury last Price’s stock price (US6M) in Real time. CNBC. https://www.cnbc.com/quotes/US6M
How do rising interest rates affect the stock market?. U.S. Bank. (2022, February 16). https://www.usbank.com/investing/financial-perspectives/market-news/how-do-rising-interest-rates-affect-the-stock-market.html
Yahoo! (n.d.). Yahoo Finance - Stock Market Live, quotes, Business & Finance News. Yahoo! Finance. https://finance.yahoo.com/
If I was an investor and saver I would put my money into a bond too. My risk profile is not the highest in general so after knowing that the tech stocks are struggling I would pull out my shares and get a bond instead like you said in the first bit of your post. I do think that the stock market like you said is deafeningly not where they want to be, this reminds me of the Wall Street crash in 1929. This effected businesses drastically and money was gone within seconds due to the crash and it was messy for businesses. I wonder if we are going to find ourselves in a huge financial crash like we did then (and that crash effected the whole world not just us in the States).
ReplyDeleteAs the Fed hiked interest rates, yields across bond markets were also going up. Which explains the decline in the equity markets response. With higher rates, the value of future earnings is less attractive compared to bonds that would pay more competitive yields.
ReplyDelete