Is it true that 'when interest rates fall, stocks rise'? We checked 10 years of data and found the opposite
A story you often hear in the news.
‘US interest rates have fallen. This is a tailwind for stocks.’
To see if this is true, we counted and verified 10 years’ worth, or 2,447 days of data.
What you will learn in this article
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What exactly are interest rates?
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What happened to stocks the day after interest rates suddenly fell?
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So, what determines stock prices the next day?
What are interest rates?
Interest rates are the rental fee for borrowing money.
You borrow 1 million yen and pay back 1.03 million yen a year later.
In this case, the interest rate is 3%.
When interest rates fall, you can borrow money more cheaply.
It becomes easier for companies to build factories or hire people.
That is why it is said that ‘interest rates fall → companies make more profit → stocks rise’.
This is not wrong in the long run.
This time, we checked whether ‘stocks rise the next day after interest rates fall’.
What happened to stocks the day after interest rates suddenly fell?
On an average day, the Nikkei Stock Average rises 54%.
That is just a little more than once every two days.
However, the day after US interest rates fell sharply was 44%.
That is about 9 percentage points lower than on a normal day.
Conversely, stocks were actually slightly more likely to rise the day after interest rates went up.
The idea that ‘falling interest rates are a tailwind for stocks’ was the opposite for the following day.
Why is it the opposite?
The key is ‘when do interest rates fall sharply?‘.
US government bonds are one of the safest places in the world to park money.
When everyone gets scared, they sell stocks and move their money into government bonds.
When more people buy government bonds, interest rates fall.
In other words, a sharp drop in interest rates is a sign that ‘everyone is scared’.
To use an analogy, it’s like this.
Everyone in the class suddenly starts buying umbrellas.
What’s important isn’t that ‘umbrellas are selling,’ but that ‘it’s going to rain soon‘.
So, what determines stock prices the next day?
I compared it with other factors as well.
The strongest factor was the movement of US stocks the previous night.
This created a difference about 5 times larger than the difference when categorized by interest rates (about 12 percentage points).
Japanese stocks are strongly influenced by the U.S. stock market overnight.
Incidentally, the movement of Japanese interest rates hardly changed the stock market the following day.
Among the factors I investigated, this had the weakest correlation.
In short,
Rather than the fact that interest rates fell, ‘why they fell’ is more important.
When they fall suddenly, it might not be good news, but rather a sign that ‘everyone is afraid’.
Glossary
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Interest rate: The rental fee for borrowing money. Expressed as a percentage per year.
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Government bond: A certificate issued when a country borrows money. Buying one means you have lent money to the government and will receive interest.
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U.S. interest rates: In the news, this usually refers to the interest rate on ’10-year government bonds’.
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Nikkei 225: A figure calculated from the stock prices of 225 representative Japanese companies. It shows the overall condition of the Japanese stock market.
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S&P 500: A figure calculated from the stock prices of 500 representative U.S. companies.
Methodology
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Period: August 15, 2016 to August 20, 2026 (2,447 business days)
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‘Rose’ = The closing price of the Nikkei 225 on the next business day was higher than the previous day.
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‘Fell suddenly’ = Days when the U.S. 10-year government bond interest rate fell by 0.05% or more in one day (328 occurrences).
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‘Night of significant fall/rise’ = Days when the S&P 500 moved by 1% or more in one day.
*This article is the result of an investigation into past data. It is not a recommendation to buy or sell specific stocks.