Apr 10

How Do Higher Interest Rates Impact Stocks?

By Scott Aune, Investment Manager

It's commonly assumed that higher interest rates mean lower stock prices.

From an investor's perspective, many stocks pay dividends but the price of stocks can be much more volatile than the price of bonds. Bonds pay interest, but their prices are generally more stable than​ stocks. As bond interest rates increase, stock dividends may become less attractive since investors will prefer the higher income and greater price stability of bonds. Following this through to its conclusion, as interest rates rise and eclipse the rate of stock dividends, investors may increase their positions in bonds, causing the price of bonds to rise; and reduce their positions in stocks, causing the prices of stocks to fall.

From a business perspective, higher interest rates represent higher borrowing costs to companies, making it more expensive to do business, which may result in lower profit margins and therefore a lower stock price. 

Now that the Fed has begun raising interest rates, many investors are concerned with the impact rates have on stocks. Although higher rates are not necessarily good for stock prices, the good news is that rising interest rates aren't necessarily bad for stocks either. The conundrum lies in the fact that, in some situations — an expanding economy, for example — interest rates and stock prices can rise together. We are seeing this phenomenon now as the economy strengthens — and that's a good thing. 

The underlying message is that as the economy gains strength, increased consumer demand for goods and services may lead to more profitable companies and higher stock prices. In turn, companies will want to expand, purchase additional equipment, etc., increasing the demand for credit which results in higher interest rates. So, for a time, stock prices and interest rates can rise together.

The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Stock investing involves risks, including the loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, and bonds are subject to availability and change in price.
Author

Scott Aune, CFP®, AAMS®

VP Investment Management

Scott Aune is the VP of Investment Management for Northwest Financial Advisors. He serves as a permanent member of the firm’s Investment Committee, providing research, analytics and insight to committee membership. Scott also assists our advisors in the construction and management of investment portfolios and conducts asset allocation studies, asset manager searches, investment performance monitoring and manager due diligence.

Scott has more than 20 years of experience in the financial services industry. He is a graduate of Clark University in Worcester, Massachusetts. He also graduated from the College for Financial Planning® in Denver, Colorado, where he earned a Master of Science degree in Personal Financial Planning and the Accredited Asset Management SpecialistSM (AAMS®), designation. In addition, Scott is a CERTIFIED FINANCIAL PLANNER™ professional.

Prior to joining Northwest Financial Advisors, Scott served as Director of Research, Investment Consultant and Investment Committee member for an institutional investment consulting firm. He also served as a Financial Advisor with a prominent national financial services firm and enjoyed a successful military career as an Administrative Officer and Career Counselor with the United States Marine Corps.  

Scott resides in Arlington, Virginia with his wife Kyong. Together, they enjoy traveling, cooking, and camping in the great outdoors.

Scott Aune, CFP®, AAMS®

VP Investment Management

Scott Aune, CFP®, AAMS®

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