interest rates and stock prices

pog it

Quick question:-

Just wondering if anyone can explain to me how interest rates and stock prices correlate?
Is there anything in this that would help you trade better?

Raskolnikov

In a low-interest rate environment, the returns from fixed-income investments (bank deposits, bonds, etc) tends to be lower. This lower rate of return will usually prompt investors to move into areas with higher returns (stocks, houses, commodities). You also have the double-edged effect that with cheaper costs of borrowing, investors are more likely to leverage investments and increase the supply of money in the economy which usually leads to asset price inflation (stocks, houses, commodities).

pog it

Is there anything more cryptic to it?

I'm okay with what you explained, got my brother to talk me through interest rates just not in relation to stocks.

soddy1979

Apart from the relationships that Raskalinov showed, I don't think there is much of a relationship you could trade on. A regression model of Monthly S&P 500 returns to a Monthly FFR doesn't throw up much of a relationship. R-Squared was about 0.02

ED 209

With the surge in the DOW recently. Prolonged low interest rates seem to be devaluing the dollar and hence in comparison stocks go up. But this seems to be only over a long time. Also, low interest rates means cheaper money which means more risk taking.

You could also argue that low interest rates result in more consumer spending therefore could impact on stock/share prices.