How Do Rising Interest Rates Affect Stocks?
– Evan Shear, CFP® and Dale Crossley, JD, CrossleyShear Wealth Management
When you're investing in the stock market, a variety of factors affect where and how you choose to invest your money. Current and projected interest rates are at the top of that list. With continued headlines about rising inflation, many investors have concerns about the potential for rising interest rates in the future. When interest rates increase, they can have a significant impact on the stock market, the economy, and your own investments.
How Rising Interest Rates Affect the Stock Market
When interest rates increase, it can be tempting to make changes to your investments based on your emotions. While it's true that the stock market is often negatively affected by interest rates in the short term, there is still potential for long-term growth in your investments. Before making a decision, we always advise our clients to take a step back and consider how our proprietary investment process, Voyage, considers factors such as interest rate fluctuations in your long-term financial plan.
When interest rates and the 10-year Treasury yield increase, stock prices can shift downward, prompting many investors to sell before prices tank. Stocks that were popular for short-term investments tend to suffer, and popular investments from the prior period may take a hit. However, the interest rate isn't the only factor that affects stock prices. Investors also consider the long-term interest fluctuations, employment numbers, corporate earnings, and larger fiscal policies such as taxes and the federal budget.
How Higher Interest Affects Economic Growth
The Federal Reserve and Treasury Department work together to create a stable economic environment, particularly in times of economic difficulty. In the long term, the stock market has proven resilient, even in the face of extreme economic downturns like the "Great Recession" of 2008 or the more recent COVID-19 pandemic.
Part of that resilience comes from the Federal Reserve's control over interest rates and other market operations. When the Federal Reserve increases interest rates, it helps to slow economic growth and prevent excessive inflation. In this way, higher interest rates help stabilize the economy and keep prices for goods and services within an affordable range for consumers.
On the other hand, rising interest rates can reduce consumer spending by increasing borrowing costs for both consumers and businesses. Higher borrowing costs can result in less consumer spending, which in turn reduces corporate earnings. For that reason, stock prices tend to fall when interest rates increase.
Therefore, for the Fed, the key is to raise interest rates enough to curb inflation while keeping them low enough to avoid harming consumer spending and business growth. This allows businesses to continue reporting consistent earnings, which encourages stock prices to rise.
What Rising Interest Rates Mean for Your Stock Portfolio
When interest rates increase, stock investors start to look at long-term investments such as bonds and certificates of deposit, where rising interest rates will create a higher yield on investment. Volatility in the stock market tends to send investors in the direction of safer, fixed-income options.
It is important to note that not all stocks will perform poorly when interest rates rise. Utilities, healthcare, and household goods are all defensive investments that can yield returns even during an economic downturn. Investors will often turn to these investments and pull out of more risky sectors until interest rates stabilize again.
Finally, rising interest rates can present you with buying opportunities when demand for equities falls. Falling demand can reduce stock prices for equities, and since the housing market rebounds strongly after downturns, equity investment can be a lucrative option.
Plan for Your Future with CrossleyShear Wealth Management
In short, while rising interest rates do affect your stock investments, there are a number of ways to turn these shifts to your advantage. Our team, together with our proprietary investment process, Voyage, thoughtfully manages your short- and long-term investments, particularly in times of volatility. Contact us to learn more or schedule a checkpoint meeting. Schedule an appointment today.
Any opinions are those of Evan Shear and Dale Crossley and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred toin this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected including asset allocation and diversification. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Prepared by Muse Marketing + Creative for use by Financial Advisors.
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Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. CrossleyShear Wealth Management is not a registered broker/dealer and is independent of Raymond James Financial Services.