Tackle Today: Interest Rates Rise, So What?
January 18, 2022
≈ Here are 3 reasons it matters. ≈
Traders,
Much hay is being made about inflation and higher interest rates. If you’re wondering what all the fuss is about, we’re here to help. Over the following few Tackle Today messages, we will explain why Wall Street cares about interest rates.
Here are two different reasons why rising interest rates might hurt stocks.
- First, it increases the cost of capital which matters a great deal to those borrowing money.
- Second, it increases the discount rate of future cash flows, making every dollar earned in the future that much less valuable.
- But a case can be made for why rising interest rates might help stocks.
Interest rates historically only climb when the economy is strong and corporate profits are robust. The track record of stock performance during rising rate regimes is actually quite strong. It’s never the first few rate hikes that kill you. It’s the last one when the Fed overcorrects and tightens just a wee bit too much.
You can watch the Fed Funds rate to see when the Fed finally lifts borrowing costs off zero. But, if you want to know how the market prices in rate hikes ahead of time, then look to bond yields. You can measure them over various durations, but the ten-year yield is the most popular—ticker symbol $TNX.
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