Stock Market Selloff Continues As Investors Worry About Higher Interest Rates (2024)

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Stock Market Selloff Continues As Investors Worry About Higher Interest Rates (2024)

FAQs

How does the stock market react to higher interest rates? ›

The Bottom Line

As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down. But there is no guarantee as to how the market will react to any given interest rate change.

Why are rising interest rates bad for investors? ›

A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.

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Why do firms tend to cut stocks when interest rates are high? ›

With rates spiking up to 5%, though, a good return can be had from cash and government bonds with the same low risk. They therefore become more attractive than stocks to some investors. Many will sell out of stocks to buy government bonds or hold cash as a result, pushing down prices. The inverse is also true.

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Why am I rising interest rates depressed stock prices? ›

All else equal, asset values have an inverse relationship to changes in interest rates. As interest rates rise, asset prices generally fall because the cash flows are discounted at a higher rate, making them less valuable today.

Who benefits from higher interest rates? ›

As interest rates rise, the interest income from loans typically increases faster than the interest paid on deposits, leading to wider profit margins. Additionally, higher interest rates can boost the earnings of insurance companies and investment firms, as they often hold large portfolios of interest-sensitive assets.

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What stocks do well when interest rates rise? ›

Financials First. The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.

Why are investors attracted to high interest rates? ›

Foreign investors would be attracted to the higher interest rate if they are able to receive a better return on their investment than they would get from their local market. It sounds like your confusion might arise from the fact that a higher interest rate would mean the borrower has to pay out more in interest.

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Do investors want high or low interest rates? ›

Unsurprisingly, bond buyers, lenders, and savers all benefit from higher rates in the early days. Bond yields, in particular, typically move higher even before the Fed raises rates, and bond investors can earn more without taking on additional default risk since the economy is still going strong.

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Why raising interest rates is wrong? ›

Where rates do matter, Kelly said, is in financial markets, which in turn can affect economic conditions. “Rates too high or too low distort financial markets. That ultimately undermines the productive capacity of the economy in the long run and can lead to bubbles, which destabilizes the economy,” he said.

What is interest rate risk in the stock market? ›

Interest rate risk is the probability of a decline in the value of an asset resulting from unexpected fluctuations in interest rates. Interest rate risk is mostly associated with fixed-income assets (e.g., bonds) rather than with equity investments. The interest rate is one of the primary drivers of a bond's price.

Why do businesses invest less when interest rates rise? ›

Higher cost of capital: The cost of capital is the rate of return that businesses must generate on their investments to satisfy their stakeholders. When interest rates rise, the cost of capital rises as well. This makes it more difficult for businesses to justify new investments, which can slow long-term growth.

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Should you sell bonds when interest rates rise? ›

If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.

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Do bank stocks do well when interest rates fall? ›

“If we see the interest rates drop and that alleviates some of the pressure on defaults, that will be positive for them. It will also indicate they are trying to stimulate the economy, which will also be good for them,” White said.

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What happens to stock prices during a depression? ›

During a recession, stock prices typically plummet. The markets can be volatile with share prices experiencing wild swings. Investors react quickly to any hint of news—either good or bad—and the flight to safety can cause some investors to pull their money out of the stock market entirely.

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Do bank stocks go up when interest rates rise? ›

Generally, higher interest rates are bad for most stocks. A big exception is bank stocks, which thrive when rates rise.

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What happens to stocks when inflation rises? ›

How Does Inflation Affect Stocks? Inflation hurts stocks overall because consumer spending drops. Value stocks may do well because their prices haven't kept up with their peers. Growth stocks tend to be shunned by investors.

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What is the stock market prediction for 2024? ›

Projections for strong earnings are a positive. Analysts expect overall S&P 500 earnings to rise 10.4% in 2024, LSEG data showed. But stocks are also at high valuation levels.

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Why do rising interest rates generally depress stock prices? ›

Why do rising interest rates generally depress stock prices? Businesses have to pay higher interest rates to borrow money, thus reducing their profit. Stock investors tend to take their money out of the stock market & invest in interest paying investments. Future earnings will not be worth as much as today.

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