With Feds raising rates will stocks

[street]

With Feds raising rates will stocks start to slidding downward?

 

[TwoByFour]

Perhaps, eventually. The Fed rate has nothing to do with corporate bond rates, but both react to inflation, which is apparently rising. Companies rely on bonds to raise capital and if corp bonds are paying a higher yield, it is costing the company more to raise money, which slows down their operations a bit. I'm not worried about it.

 

[jazz4cash]

Nah. Raising rates is a sign the economy is growing. Stocks will grow along with the economy until something gets out of whack. The Fed will always hike one time too many and everyone will blame that last hike for whatever goes out of whack. Growth will stall, stocks will fall, rates will slide. Rinse and repeat. Whatever goes out of whack will spread throughout the economy to areas that were not understood to be related. I think it could be caused by crypto or some other exotic activity.

 

[pb4uski]

I would say no. The Fed raises rates in response to a good economy and a good economy is good for stocks.

Any slight increase in the cost of capital is probably not a significant issue because companies are pretty flush with capital already... they can't find ways to deploy that capital in ways that earn more than their cost of capital so they do stock buybacks.

 

[street]

Those are great explanations on how that works. Thanks

 

[OldShooter]

Legend avers that an alert young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate.”

(ref: https://quoteinvestigator.com/2013/09/28/market-fluctuate/)

 

[njhowie]

Possibly. Increasing interest rates means that the risk-free rate of return is going higher. Go back to your Investing 101 college course - as the risk-free rate goes higher, it is going to entice an increasing number of folks to not want to take the higher risk of being in stocks. It doesn't all happen at once, it's gradual. Some are going to be happy to lock in 3% long term. For others, the magic number is going to be 4%. Still others will gradually back away when they can secure 5%. This is exactly the reverse of what took place as rates were pushed to zero - folks who rely on fixed income were getting nothing, so they were forced in to stocks to get their yield. It's worked out extremely well for them. Now, as rates move higher, they can get their fixed income without the market risk.

Stocks have been fully valued for some time now (in my view). At some point the effects of the rising interest rates are going to be putting pressure on the stock market.

 

[UnrealizedPotential]

I would say maybe. The question is can the Fed slow down the economy without causing a recession, assuming there are no other shocks to the market, which is assuming a lot. It seems likely at some point that the market will wake up with a hangover over rate increases. But it doesn't necessarily have to happen this way.



My feeling is even if we don't have a recession in the next year or so and everything looks good, I think we will probably get a correction . They are normal and just a part of the process. But I'm just guessing like everyone else. No one really knows.

 

[pjigar]

It's just a point in the inevitable greed and fear cycle. Learn to NOT react.

My simplified version of the cycle:
Economy heats up -> Inflation goes up -> fed raise rates -> credit tightens -> cost of doing business goes up -> profit shrink -> companies lay off -> unemployment goes high -> people buy less -> economy cools off -> inflation goes down -> fed lowers rates -> credit loosens -> companies borrow -> hires workers to grow -> everyone has money -> economy heats up -> rinse and repeat.

Same old every time. Pundits will figure out ways to explain that "this time it's different".

 

[audreyh1]

There is a business cycle.

Rising inflation and the Fed raising rates comes near the end of the business cycle.

But it can still take a while for stocks to roll over.

Personally, I believe that we had quite a bit of asset inflation from 2013 onwards due to the Fed Quantitative Easing program. They stopped buying bonds in 2016, and started to unwind their balance sheet of Treasuries and mortgage-backed bonds in 2017. In October they will be fully ramped up to reducing bond repurchases by $50B a month ($30B in treasuries, and $20B in mortgage-backed bonds). This means the bond supply is increasing by that amount every month which means a bit more pressure on bond prices (higher rates). At the same time they are raising the Fed Funds rate, with no indication of stopping for a while.

At some level, this unwind has to cause some air to be taken out of asset classes such as stocks.

When? Who knows. It could be sudden. And US long rates are also somewhat driven on global interest rates and global demand/exchange rates, etc.

 

[jazz4cash]

I don’t have much need for cheap money anymore. I need to get paid more to let others use my funds.

 

[TwoByFour]

Here is another way to look at it: Trump was disappointed that the Fed raised the overnight rate. Reason why? It slows the economy down when interest rates rise which means the GDP, which all presidents like to tout if it is increasing, will decline a bit. If the GDP is decreasing, companies are producing less, which means their earnings will fall, their PE will rise, investors will think they are over-valued and the stock price will fall. At least in theory this is what will happen.

 

[Oz investor]

With Feds raising rates will stocks start to slidding downward?

i will disagree with the consensus here

and suggest companies that have a lot of debt obligations will slide down ( debt repayments should cut into profits )

however debt-free companies may not zip ahead as the perception might be they will be less likely to make big acquisitions , or other major expansions

the debt-loading on the companies is more a factor than the Fed decisions

 

[GrayHare]

If the rate keeps increasing eventually stocks will take a hit. Historically that happens around the time 10 year Treasury gets to 5%.

 

[Kwirk]

I'm in complete agreement with audreyh1's assessment.

The Fed pushed a lot of very cheap money into circulation and I suspect that a substantial portion of that money was used by sophisticated investors to buy stocks, helping to push up the price of stocks. As the Fed starts pulling that easy money out of circulation I expect interest rates to rise and the profitability of borrowed-money stocks to decrease. At some point those borrowed-money investors may get antsy and begin pulling money out of stocks to repay the loans. I don't know when that will happen but I suspect that, as audreyh1 says, it could happen rather suddenly. Defaults by other nations or their banks may be a trigger point.

Then there are also the investors playing with their own money who, as interest rates rise, will begin to find bonds more attractive than volatile stocks and will begin selling stocks to buy bonds or CDs. My guess is that this will happen more slowly than the unloading by the borrowed-money investors.

This is obviously speculation on my part but I'm curious to see what happens.

 

[street]

Interesting information and very well explained and why. I have also been told when the prime rises the stocks will go down. I have always understood that processes but again know one really knows or can predict when.