What are the effects of interest rates to the stock market performance.?
Stocks are priced just like any other financial asset: The present value of expected future cash flows.
Present value is cash flows discounted back at the current interest rate; the formula is as follows:
Since interest rates are in the DENOMINATOR; raising interest rates will LOWER the stock price, lowering them will raise the stock price.
Lower rates allow more money to flow into the economy. More money increases demand for stocks, so they go up.
Too much money will ultimately inflate stock prices to levels unrelated to company performance, leading to a crash later. Overall the stock market shouldnt grow faster than the economy.
High interest rates reduce stock prices, as money will be pulled out of stocks to be invested in debt instruments. Much of the recent US stock market boom has been a result of low interest rates.
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