Interest rates and stock movements

In a world filled with eye-catching headlines, social media, and an overwhelming stream of information, it is difficult to pinpoint what drives movements in investment portfolios. From financial uncertainty, weakening dollar, global pandemics, inflation and most recently, oil restrictions and wars, markets seem to react to a new story every day.

Yet time and again, one common factor tends to sit at the center of most market rallies and pullbacks: interest rates.

Interest rates affect nearly everyone — through CD rates at the local bank, car loans or mortgage payments. Simply put, higher interest rates reward savers but make borrowing more expensive, while lower rates do the opposite. These same factors play an important role with your investment accounts.

For most working-age individuals, investing through a 401(k) or other investment accounts includes exposure to stocks. Whether through individual stocks or diversified mutual funds and exchange-traded funds, investors ultimately own pieces of companies and those companies are influenced by changes in interest rates.

When companies want to grow, they often rely on borrowing. As interest rates rise, borrowing becomes more expensive, which can reduce profits and place pressure on stock prices. At the same time, higher rates tend to encourage saving and discourage borrowing among consumers like us. When people spend less, less money flows through the economy, weighing on profits & lowering stock prices.

Interest rates have affected some of our most recent past pullbacks and market rallies. In 2018, rate cuts brought down stock prices. In 2020, growth was due partially to historically low interest rates post Covid restrictions. During the 2022 drop, inflation was high, causing interest rates to rise.

Even recent events such as oil restrictions show this connection. Oil affects nearly every aspect of daily life, from transportation and manufacturing to construction. Rising oil prices increase the cost of goods and services, contributing to inflation. Historically, rising inflation has often led to higher interest rates as the Federal Reserve works to keep price increases in check. These rate changes affect consumer behavior, company profits and again stock prices.

For retirees or pre-retirees, interest rates also impact conservative investments such as bonds. For example, if you own a bond paying 3 percent interest and new bonds are sold at 5 percent, your 3 percent bond becomes less attractive and its value declines. Conversely, if you hold a 5 percent bond and new bonds are paying only 3 percent, your bond becomes more valuable.

Put simply, interest rates are one of the most important factors to follow in the investment world. They affect individuals and businesses, and play a significant role in the performance of our investments. If you need help navigating this, reach out and I would be happy to chat!

Cole Mertens is a certified financial planner at Wallstreet Group Advisors in Jefferson City. Contact him at 573-636-3222 or [email protected]. Securities and advisory services offered through CreativeOne Securities, LLC member FINRA/SIPC and an investment advisor. Wallstreet Group Advisors and CreativeOne Securities, LLC are not affiliated.