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2 Important Investing Perspectives for Today’s Stock Market Environment

There are no shortage of worries in the stock market right now.

One of the issues that may be troubling investors is the possible interest rate hike by the US Federal Reserve. But instead of worrying, let’s put things into perspective.

Perspective 1: There is a difference between raising rates and the level of interest rates

I’ve discussed more about this important distinction in here.

Perspective 2: Rising interest rates are not necessarily bad for stock prices

Investor Teh Hooi Ling has another interesting perspective. In her book Show Me the Money, Teh, who was a renowned local financial journalist before she joined an investing firm, mused about the lack of correlation between the movement of the Singapore Interbank Offered Rate (SIBOR) and the Straits Times Index (SGX: ^STI):

“For example, the one-year Singapore interbank rate rose from 3.8% in early 1988 to 7.8% by June 1990. During that time, the Straits Times Index climbed by about 60%. In 1994-1995, and during the Asian Financial Crisis, rates climbed and stock prices fell. But in early 2000, both rates and stock prices fell in tandem. And they climbed in tandem between 2003 and 2006. Then in 2008, the global financial crisis brought both stock prices and interest rates down. In 2009 and 2010, while rates have stayed low, stock prices have rebounded strongly.”

The three month SIBOR, a rate based on interest rates that banks use when lending unsecured funds to each other, has been mostly hovering around the 0.4% level since the start of 2009. But, oil and gas companies such as Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) have seen their stock prices fluctuate wildly over the same period.

Keppel Corp, for instance, has seen its stock price move from a low of $4.10 at the start of 2009 to a high of nearly $12 in 2011. The stock closed at $6.97 yesterday largely on the back of worries in the oil and gas sector.

Said another way, while the SIBOR has been unchanged for long periods since 2009, some stocks have been moving up and down based on factors beyond interest rates alone. This shows how important it is to put into context any news you see regarding how interest rates may affect stocks.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.