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Stocks And Interest Rates: A Simple Guide

In case you haven’t heard, last night, the Federal Reserve had finally raised interest rates in the U.S. after nearly a decade of not doing so.

There’d likely be plenty of opinions pinging back and forth in the media and financial institutions about what the rate hike would mean for stock markets around the world.

To straighten out all the hullabaloo, my colleague Morgan Housel had penned a great straightforward guide to what U.S. stocks would do when interest rates climb. Here it is:

“Higher interest rates makes bonds more attractive. That’s bad for stocks.

But the Fed is raising rates because the [U.S.] economy is strong. That’s good for stocks..

Higher rates could mean higher inflation is anticipated. That’s bad for stocks.

But higher inflation could increase revenue growth. That’s good for stocks.

Higher rates could curtail lending. That’s bad for stocks.

But less lending reduces the odds of a credit crisis. That’s good for stocks.

Higher rates could hurt leveraged companies. That’s bad for stocks.

But higher rates increase the interest income for companies with lots of cash. That’s good for stocks.

Higher interest rates mean the Fed is taking away the punchbowl. That’s bad for stocks.

But higher rates mean the Fed has room to cut interest rates when it needs to. That’s good for stocks.

So, who knows [emphasis mine].”

To sum up Morgan’s guide-to-what-would-stocks-do-when-interest-rates-climb, it would be this: ¯\_(ツ)_/¯

And I agree. No one really knows. This is very important to note for us investors in Singapore. The effects of a U.S. interest rate hike on the U.S. stock market is already unclear. It’d be even murkier when it comes to stocks in Singapore.

So, focus on things we can control, as Morgan suggested in his piece – things like how long you can stay invested for and what stocks you choose to buy. These can have massive effects on your investing results.

For instance, it has been shown historically that the odds of the Straits Times Index (SGX: ^STI) making a loss declines the longer an investor can hold on to it. There are also stocks with trouble signs – such as poor fundamentals or sky-high prices – that are perhaps best avoided.

Billionaire investor Warren Buffett has been in the investing business for more than five decades. And in all those years, he has never bothered about macroeconomic factors like “what would the Fed do” when he makes his investing decisions. His focus has always been – and is very likely to continue to be – on things he can control, like his investing time horizon and the businesses he buys.

Buffett’s experience is perhaps the best piece of advice I can think of when it comes to the circus surrounding the question of what would stocks do when interest rates climb.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.