Hi all,
In the second stage of Business cycles they say we have rising short-term interest rates, and rising stock prices.
Firstly, aren’t they inversely related? So, rising short-term rates would mean a bad performance of stock prices, right?
Secondly, inflation is low, and the economy is in recovery mode at that point. Why wouldn’t the short term interest rates continue to fall as in the previous stage (Initial recovery)?
Thanks
I look at it as a game of Dog chase Cat and Cat chases Mouse.
Stocks move first, then Rates start to move up after it, Then Inflation follows Rates.
Once everything is going up, stocks (the mouse) starts heading the opposite way from rates (the cat) as it’s closing in. Rates start to chase stocks and at this point trying to revitalize the economy. Next Inflation starts chasing rates.
Probably a very bad example and you’re probably looking for more detail.
So, what you said about rising rates is true, but it doesn’t happen instantaneously. That’s why stocks slow down before headed downhill. But “high” (already risen) interest rates do put downward pressure on stocks.
Stock price is a function of both expected future earnings and interest rates. If expected future earnings are rising faster than interest rates, then stock price will rise even if interest rates are rising.