Weekend Reading: Stocks Don't Rise or Fall Because of Interest Rates

This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
Weekend reading stocks and interest rates Weekend reading stocks and interest rates
Weekend Reading

If news headlines of the Fed raising short-term interest rates has you feeling frazzled – particularly in relation to the market – here’s your signal to remain calm.

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Beyond historical context: While many U.S. investors believe they witnessed interest rates moving stock prices down in the early 2000s and also following the 2008 financial crisis, the reality is, a variety of other factors play into the direction stocks go. Typically, investors choose specific stocks based on technical analysis, values-based considerations or simply speculation. Overall, these areas have minimal (if any) ties to interest rates, which shows that stock prices in general don’t always reflect the current value of a company’s future cash flow.

In fact, the past 140 years shows us a -0.21 correlation between 10-year Treasury yields and the price earnings ratio for the U.S. stock market (meaning a very weak correlation). Above all, however, the primary reason you should have skepticism toward any interest rate-market relation is because if they do in fact move each other in opposite directions, then it should work both ways – when interest rates go down, stocks go up – and that is a rare occurrence.

My two cents: You shouldn’t panic over the potential for rising rates moving forward when leveraging historical data; however, that doesn’t mean this time won’t be different. You always need a plan for up, down or sideways markets.