Is 'Rate Hikes = Stock Price Drops' True? The Reality of 'Real Interest Rates' and Stock Prices You Should Know in an Inflationary Era
‘The Bank of Japan is considering a rate hike,’ ‘The Fed is raising interest rates’—
Every time they see news like this,
many individual investors brace themselves, thinking,
‘Isn’t the era of falling stock prices finally coming…?’
If interest rates rise, the burden of corporate debt repayment increases,
and ordinary households tighten their purse strings due to things like mortgage payments.
Therefore, it’s negative for stocks.
That is what is taught in textbooks.
However,
when looking at the current market and the views of professional investors, surprisingly,
many people do not abandon their ‘bullish on stocks’ stance.
Why are they not overly afraid of rate hikes?
The key to this lies in two perspectives:
‘real interest rates’ and ‘corporate pricing power.’
1. Do not be deceived by superficial numbers.
The decisive difference between ‘nominal interest rates’ and ‘real interest rates’
The most important thing when looking at interest rates is
not the ‘policy interest rate (nominal interest rate)’ itself that appears in the news,
but the
‘real interest rate,’ which is the interest rate minus the inflation rate.
This might sound a bit difficult on its own, so
let’s think about it with a familiar example.
[Analogy]: Thinking about real interest rates with ‘100-yen apples’
Suppose you have 10,000 yen on hand,
and you can currently buy ‘100’ apples at 100 yen each.
<<When the bank interest rate (nominal interest rate) is 2%>>
One year later,
your savings will increase to 10,200 yen with interest.
<<When the inflation rate in the world is 4%>>
The price of apples will also rise,
and they will be 104 yen one year later.
If you buy apples with the 10,200 yen you have one year later…
10,200 ÷ 104 = you can only buy about 98 apples.
Even though the number in your bankbook (nominal) has increased
from ‘10,000 yen to 10,200 yen,’
the actual number of apples you can buy has decreased.
This is the true nature of a state where
‘real interest rates are negative (2% – 4% = -2%).’
If you leave your money in the bank as cash,
even if you receive interest,
the real asset value will gradually decrease.
That is precisely why
funds must move from cash to
‘assets that rise in value in line with inflation (goods and stocks).’
2. Central banks continue to fall ‘behind the curve’
‘But won’t they raise interest rates more to curb inflation?’ is a question that arises.
However,
the speed at which central banks raise interest rates tends to be a pursuit of rapidly advancing inflation
(technically known as ‘behind the curve’).
Because they cannot afford to cool down the economy all at once,
in an environment where the inflation rate is 3-4%,
raising interest rates to 4% or 5% all at once
is not easy.
As a result,
a state where ‘interest rates are being raised, but the inflation rate is still higher (real interest rates remain negative)’
continues for a long time.
As long as real interest rates are negative,
in asset management,
‘holding onto cash’ becomes the greatest risk,
and a structural tailwind will continue to blow in the stock market.
3. Why do corporate profits increase with inflation?
Another point is that
corporate performance (sales and profits) also has its nominal figures inflated by inflation.
For example,
imagine a beef bowl chain.
<<Before inflation>>
⭐️400 yen per bowl (cost 200 yen)
⇒ 100,000 bowls sold ⇒ profit 20 million yen
<<After inflation>>
※Because raw material costs soared and the cost rose to 250 yen,
the price was raised to 500 yen.
If the number of customers remains at 100,000 bowls…
⭐️500 yen per bowl (cost 250 yen)
⇒ 100,000 bowls sold ⇒ profit 25 million yen (+5 million yen)
The profit amount recorded in the financial statements (nominal profit)
is automatically boosted by inflation and price increases.
If the profit figures earned by companies increase,
the theoretical value of stock prices will naturally be pushed up as well.
4. However, ‘not all stocks will rise’
Reading this far,
you might think, ‘Then should I just buy any stock?’
but this is the biggest pitfall.
In periods of inflation and rising interest rates,
companies will be cruelly polarized.
⭕️Winners (companies that can pass on costs):
Companies that ‘have technology that cannot be replaced by other companies,’
‘have an overwhelming brand,’
or ‘are indispensable as infrastructure.’
Even if costs rise, they can confidently raise prices,
and they will significantly increase nominal profits while maintaining profit margins.
⭕️Losers (companies that cannot pass on costs):
‘Daily necessities that can be bought anywhere,’
‘manufacturers in a subcontracting structure that cannot negotiate price increases.’
They cannot charge customers for the soaring costs of purchasing, electricity, and labor,
and they absorb the costs themselves, causing profits to plummet.
The market as a whole (Nikkei 225, TOPIX, S&P 500, etc.)
tends to remain firm because it is driven by large top-tier companies with excellent pricing power,
but when choosing individual stocks,
‘Does this company have the power to raise prices without losing customers even if costs rise (pricing power)?’
determining this
becomes the decisive criterion that separates the success and failure of an investment.
Summary:
The rate hike phase is a chance to see the ‘essence’
1. As long as the real interest rate (nominal interest rate – inflation rate) is
negative, the value of cash will decrease, and funds will easily gather in assets such as stocks.
2. Under inflation,
the nominal performance (sales/profit figures) of companies that can properly raise prices
will expand.
3. That is why, instead of fearing ‘interest rate hikes = uniform stock price drops,’
it is important to select and continue holding ‘companies with strong models that can firmly pass on costs.’
Do not be swayed only by the numbers in news headlines like ‘interest rate hike of X%,’
but if you have the perspective of ‘how is the value of money moving compared to prices?’
the market landscape should look completely different.