Author Topic: Interest rates, the SP500 and the USD  (Read 2990 times)

nobodyspecial

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Interest rates, the SP500 and the USD
« on: June 23, 2015, 12:47:33 PM »
Interest rates are (at some point) going to go up - on the basis that they can't really go down
Economics 101 says that when rates go up stock markets go down, but when rates go up so does the currency.

If you are buying US stocks with foreign money which of these effects dominates?
Is there a historical or theoretical rule which states if rates go up by X% the market drops by Y%, and the USD rises by Z% ?

nereo

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Re: Interest rates, the SP500 and the USD
« Reply #1 on: June 23, 2015, 01:04:53 PM »
Interest rates are (at some point) going to go up - on the basis that they can't really go down
Economics 101 says that when rates go up stock markets go down, but when rates go up so does the currency.

If you are buying US stocks with foreign money which of these effects dominates?
Is there a historical or theoretical rule which states if rates go up by X% the market drops by Y%, and the USD rises by Z% ?
1) I think you are assuming too much; Yalen's been pretty clear that she wants to start raising rates sooner rather than later, and as such my feeling is that the market has already 'priced in' an increase in rates.  Plus, there's the question of where else that money would flow to if interest rates were raised by a small amount.  Foreign equities look rocky and if hte increase is a quarter or half percent I don't think that will be compelling enough for a mass exodus of cash from the stock market to the bond market.

2) 'foreign money' is going to depend entirely on which foreign money you are talking about.  greece ≠ japan ≠ austrailia ≠ etc.
even so, while there's a negative correlation between rate hikes and market price, it's not very strong and fairly temporary (lasting days to months). 
The correlation between USD and some foreign currency is a comparison between the strentghs of those two individual currencies.

forummm

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Re: Interest rates, the SP500 and the USD
« Reply #2 on: June 23, 2015, 01:10:53 PM »
Interest rates are (at some point) going to go up - on the basis that they can't really go down
Economics 101 says that when rates go up stock markets go down, but when rates go up so does the currency.

If you are buying US stocks with foreign money which of these effects dominates?
Is there a historical or theoretical rule which states if rates go up by X% the market drops by Y%, and the USD rises by Z% ?


Professionals have already analyzed this and stocks and bonds are already priced based on the best available information. Do you think you can do better than they can?

Sometimes stocks rise when interest rates do. Sometimes they don't.

The USD is already very high. Will it be pushed even higher by a rate hike?

When will that rate hike happen? People have been saying it would happen for the past few years.

Financial.Velociraptor

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Re: Interest rates, the SP500 and the USD
« Reply #3 on: June 23, 2015, 02:03:15 PM »
The inverse correlation between rates and market price is stronger when rates are already high.  When rates are very low, the correlation is very weak.  The rate rise is a non-event for the US unless it is very large and only if the bump in short term rates actually translates to long term rates.  Else, the raise is Pyrrhic. 

nereo

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Re: Interest rates, the SP500 and the USD
« Reply #4 on: June 23, 2015, 02:11:57 PM »
The inverse correlation between rates and market price is stronger when rates are already high.  When rates are very low, the correlation is very weak.  The rate rise is a non-event for the US unless it is very large and only if the bump in short term rates actually translates to long term rates.  Else, the raise is Pyrrhic.
two points to you, Financial.Velociraptor, for getting me to look up the etymology of the word Pyrrhic.

nobodyspecial

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Re: Interest rates, the SP500 and the USD
« Reply #5 on: June 23, 2015, 02:17:09 PM »
The inverse correlation between rates and market price is stronger when rates are already high.  When rates are very low, the correlation is very weak. 
I wondered about that.
If rates are high then yes, being able to get 10% in a savings account certainly makes investors look at why they are holding stocks.

But a rate increase of 0.25% on a base of 0.25-0.5% is a much bigger deal for consumers than at 10%, if it means their mortgage or car loan payments go up by 50%. And if that means they can't afford to buy consumer toys that has a bigger effect on Apple's stock price


nereo

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Re: Interest rates, the SP500 and the USD
« Reply #6 on: June 23, 2015, 02:32:03 PM »
The inverse correlation between rates and market price is stronger when rates are already high.  When rates are very low, the correlation is very weak. 
I wondered about that.
If rates are high then yes, being able to get 10% in a savings account certainly makes investors look at why they are holding stocks.

But a rate increase of 0.25% on a base of 0.25-0.5% is a much bigger deal for consumers than at 10%, if it means their mortgage or car loan payments go up by 50%. And if that means they can't afford to buy consumer toys that has a bigger effect on Apple's stock price
This (above, bolded) won't happen.
If interest rates increase by a quarter of a percent then a person's mortgage or car loan payments may go up a similar amount IF they have an ARM/adjustable rate.  But that won't equal a 50% increase in their payments unless they had an interest-only loan, which is pretty rare these days with the changes in the way loans are handled.

As an example, if you currently have a 30yr/$200k note at 4%, and it jumps all the way to to 5%, that's a jump of only $119 or ~12%.  In reality, a 0.25% rate increase would even less of an increase. Shorter term loans (like a 5 year car loan) would have an even smaller increase. 

nobodyspecial

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Re: Interest rates, the SP500 and the USD
« Reply #7 on: June 23, 2015, 03:07:01 PM »
This (above, bolded) won't happen.
Added to which, if people's loan payments go up they just make the minimum payment and STILL buy a new iPhone (sadly)

nereo

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Re: Interest rates, the SP500 and the USD
« Reply #8 on: June 23, 2015, 03:22:50 PM »
This (above, bolded) won't happen.
Added to which, if people's loan payments go up they just make the minimum payment and STILL buy a new iPhone (sadly)
yup - a large percentage of our society will keep spending every dollar they make, regardless of the economic conditions, and then they'll whine about how hard it is to make ends meet with their particular salary.
Funny how there's always someone who makes less but still seems to be getting by.