(The reference materials are available in both Chinese and English)
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Generally speaking, interest rates fall and stock prices rise; When the interest rate rises, the stock price will fall. Therefore, the level of interest rates and the relationship between interest rates and the stock market have also become an important basis for stock investors to buy and sell stocks.
The impact of interest rates on stocks can be divided into three ways:
The first is the portfolio substitution effect caused by interest rate changes. By influencing the rate of return on deposits, investors will choose between stocks, savings and bonds to maintain and increase the value of capital.
Through asset reorganization, the flow and direction of funds will be affected, which will inevitably affect the supply and demand of funds and stock prices in the stock market. With the interest rate rising, some funds may be transferred from the stock market to bank savings and bonds, which will reduce the supply of funds in the market, reduce the demand for stocks and lower the stock price; On the other hand, the interest rate drops, the stock market capital supply increases, and the stock price rises.
Second, the impact of interest rate on the operation of listed companies, and then affect the future valuation level of the company.
The increase of loan interest rate will increase the interest burden of enterprises, thus reducing the profits of enterprises, and then reducing the stock dividends of enterprises. Due to the double influence of interest rate increase and stock dividend decrease, the stock price will inevitably fall. On the contrary, the reduction of loan interest rate will reduce the interest burden of enterprises, reduce the production and operation costs of enterprises, improve the profitability of enterprises, and make enterprises increase the dividend distribution of stocks. Affected by the reduction of interest rates and the increase of stock dividends, stock prices will rise sharply.
Third, the impact of interest rate changes on the intrinsic value of stocks.
The intrinsic value of stock assets is determined by the future cash flow of assets, and the intrinsic value of stocks is inversely proportional to the discount rate under certain risks. If the interest rates of inter-bank lending, inter-bank bonds and bond repurchase of the stock exchange are taken as the reference discount rate, the increase of the discount rate will inevitably lead to the decrease of the intrinsic value of the stock, which will also lead to the corresponding decline of the stock price. The change of stock index is opposite to the discount rate of the market. When the discount rate rises, the intrinsic value of the stock declines, and so does the stock index. On the contrary, the discount rate drops and the stock price index rises.
The above communication channels should take a long time to be reflected. There is usually a time lag effect between interest rate adjustment and stock price change, because interest rate reduction first causes savings diversion, increases the supply of stock market funds, and more funds chase the same number of stocks, which can lead to stock price rise. There is a process between interest rate cuts and stock price rises. For example, the Bank of China has lowered the deposit interest rate 1996 eight times since May. By 2002, the periodic real rate of return of 1 year was only 1.58%. When the stock price keeps rising for a long time, the return on stock investment is much higher than the return on deposits, and some savings deposits are converted into stock investment, thus accelerating the pace of savings diversion. Judging from the growth rate of China's residents' savings deposits, the growth rate of China's residents' savings deposits was 45.6% in194, and then the growth rate decreased year after year. At the same time, the stock market developed rapidly, and the savings diversion began to accelerate obviously in the second half of 1999, reaching its peak in 2000. In the same year, the growth rate of savings deposits of China residents was only 7.9%. The stock market is also very optimistic this year. 200 1, the savings diversion slowed down obviously, with the growth rate of 14.7%, and the residents' propensity to save increased. The fluctuation of 200 1 stock market has increased, and its share price has fallen sharply for several months, which is one of the main reasons for the slowdown of 200 1 savings diversion and the substantial increase of residents' savings deposits.
In addition, the impact of interest rates on the operating costs of enterprises also needs a capital operation process of production and sales, which is difficult to reflect in a short time. Therefore, the correlation between interest rate and stock market should be grasped for a long time.
In fact, in the medium and long term, the rise and fall of interest rates and the rise and fall of the stock market are not simply negatively correlated. In other words, the trend of medium and long-term stock price index is not only affected by the trend of interest rate, but also sensitive to economic growth factors and non-market macro-policy factors. If the influence of economic growth and non-market macro-policy factors on the stock market is greater than that of interest rate, the trend of stock price index will deviate from the long-term trend of interest rate.
Under normal circumstances, the interest rate adjustment in the United States and the stock market trend have a process of simultaneous rise. During the period of 1992- 1995, due to the steady economic growth, the gradual tightening of monetary policy did not make the economy decline, and the company's profits and stock price trends also maintained a good trend. The fundamental reason why the stock market rose after raising interest rates is that the impact of economic growth is greater than that of raising interest rates.
China entered the inflection point of interest rate reduction cycle from May 65438 to May 0996. The stock index has also entered a rising cycle. In the past five years, interest rates have been negatively correlated with the trend of stock indexes. However, at 200 1, when the interest rate did not enter the interest rate hike cycle, the stock index began to fall. By analyzing the reasons, the influence of non-market macro-policy factors on the stock market in China is greater than the interest rate. People's worries and fears about the entry of non-circulating state-owned shares into the market have led to asymmetric changes in the risks and returns of stock market investment. From this point of view, the impact of interest rate on the stock market cannot be the main factor for us to study and predict the long-term trend of the stock market, because there are still great uncertainties in the current non-market macro-policy factors in China.
It is difficult to judge the correlation between the change of interest rate and the trend of stock price in China in the short term. The fluctuation of stock price on the day and after the interest rate adjustment cannot explain the inevitable connection between the two. From the analysis of the current stock market situation, it is obviously not in line with the theory of negative correlation with interest rate trend. The stock market downturn is more due to the quality of listed companies, many institutional problems and investors' confidence. Therefore, when we look at the impact of China's interest rate hike expectations on the stock market, we should also consider many other factors, rather than simply judging the theoretical relationship mentioned in the last article. Interest rate is only one of the factors that affect the stock market, not the only decisive factor. Therefore, we should not only follow the rise and fall of interest rates, but also make a concrete analysis. Even if interest rates rise, the stock market is not completely without investment opportunities. (
Interest rate. Most people pay attention to them, and they can impact the stock market. But why? In this article, we will explain some indirect relations between interest rates and the stock market, and show you how they may affect your life.
interest rate
In essence, interest is nothing more than the cost that someone pays for using other people's money. The owner knows this situation very well. They must use the bank's money (through mortgage loans) to buy houses, and they must pay the privileges to the bank. Credit card users are also very aware of this situation-they borrow money for a short time in order to buy things right away. But when it comes to the impact of the stock market and interest rates, the term usually refers to something other than the above examples-although we will see that they are also affected. (See more, who decides the interest rate? )
The interest rate applicable to investors is the federal funds rate of the Federal Reserve. This is the fee for banks to borrow money from the Federal Reserve Bank. Why is this number so important? This is the way the Federal Reserve tries to control inflation. Inflation is caused by too much money chasing too few goods (or too much demand and too little supply), which leads to rising prices. By influencing the amount of money available to buy goods, the Fed can control inflation. Central banks in other countries are doing the same thing for the same reason.
Basically, by raising the federal funds rate, the Fed tries to reduce the money supply by raising the cost of obtaining money. (To learn more about the Fed, please read Understanding Major Central Banks, Fed Models and Stock Valuation: What It Tell Us and What It Doesn't Tell Us, and Making Monetary Policy. )
Increased influence
When the Fed raises the federal funds rate, it will not have a direct impact on the stock market. On the contrary, the increase in the federal funds rate has a direct impact, that is, the cost for banks to borrow money from the Federal Reserve becomes higher. However, the increase of discount rate will also cause a chain reaction, and the factors affecting individuals and enterprises will be affected.
The first indirect effect of the increase in the federal funds rate is that banks have raised the interest rate of borrowing from customers. Individuals are affected by the increase in interest rates of credit cards and mortgages, especially if their interest rates are variable. This reduces the amount that consumers can spend. After all, people still have to pay bills, and when these bills become more expensive, the disposable income of families will decrease. This means that people will reduce their discretionary funds, which will affect the top and bottom lines of enterprises (that is, income and profits).
Therefore, due to the behavior of individual consumers, enterprises will also be indirectly affected by the rise in the federal funds interest rate. But business has also been more directly affected. They also borrow money from banks to run and expand their business. When banks raise borrowing costs, enterprises may not borrow so much money and will pay higher loan interest rates. The reduction of business expenses will slow down the company's development and lead to a decline in profits. For additional reading on corporate loans, please read When the Company Borrows Money. )
Stock price effect
Obviously, the change of the federal funds rate will affect the behavior of consumers and enterprises, but the stock market will also be affected. Remember, one way to evaluate a company is to discount the sum of all its expected future cash flows to the present. In order to get the price of a stock, divide the sum of future discounted cash flows by the number of marketable stocks. This price will fluctuate with people's different expectations of the company at different times. Because of these differences, they are willing to buy and sell stocks at different prices.
If a company is regarded as cutting its growth expenses or reducing its profits-whether through higher debt expenses or less consumer income-the estimated amount of future cash flow will decrease. Other things being equal, this will lower the price of the company's stock. If enough companies have experienced the decline of share price, the whole market or index (such as Dow Jones Industrial Average or Standard & Poor's Index). Many people think that the price equivalent to the market will fall. (For more information, please check why the market moves. What is the driving force of stock price? What caused the major changes in the stock market? )
Investment effect
For many investors, the decline in the market or stock price is not an ideal result. Investors want to see the value of the money they invest. This kind of income comes from stock price rise, dividend payment, or both. With the decrease of the company's growth and future cash flow expectations, investors will not get as much growth from the stock price rise, thus reducing the attractiveness of holding shares.
In addition, compared with other investments, investing in stocks is considered too risky. When the Federal Reserve raises the federal funds rate, newly issued government securities, such as treasury bills and bonds, are usually regarded as the safest investments and usually experience corresponding interest rate increases. In other words, the "risk-free" rate of return has risen, making these investments more popular. When people invest in stocks, they need to be compensated for the extra risks involved in this investment, or get a premium higher than the risk-free interest rate. The expected return on investing in stocks is the sum of risk-free interest rate and risk premium. Of course, different people have different risk premiums, depending on their risk tolerance and the company they buy. However, generally speaking, with the rise of risk-free interest rate, the total return required for investing in stocks is also increasing. Therefore, if the required risk premium is reduced and the potential return remains the same or becomes lower, investors may feel that the stock is too risky and invest their money elsewhere.
Interest rate affects but does not determine the stock market.
Interest rates, usually spread by the media, have a wide and diverse impact on the economy. When interest rates are raised, the overall effect is to reduce the amount of money in circulation, which helps to keep inflation low. This also makes borrowing money more expensive, which affects how consumers and enterprises spend money; This increases the company's expenses and reduces the income of those who have debts to repay. Finally, this often makes the stock market less attractive to investors.
However, please remember that these factors and results are interrelated. What we have described above is a very extensive interaction, which can work in countless ways. Interest rate is not the only determinant of stock price. There are many factors that affect stock price and overall market trend, and raising interest rate is only one of them. Therefore, people can never safely say that the Fed's interest rate hike will have an overall negative impact on the stock price.