(LibertySociety.com) – Many obvious and not-so-apparent factors play into the movement of the stock market, including current events, economic news, and industry trends. But there’s one historically easy-to-track determinant that directly correlates to the rise and fall of stock prices: the increase or decrease of interest rates.
On August 27, Federal Reserve Chair Jerome Powell gave a speech announcing the central bank is “highly unlikely” to see a rise in interest rates in 2021. The stock market responded to his assessment the same day by closing at record highs for both the S&P 500 and NASDAQ. In addition, the Dow Jones Industrial Average closed up almost 250 points.
S&P 500, #Nasdaq hit record highs as tech stocks climb.
The broad market index gained 0.5% to set a new intraday record high; and the Nasdaq Composite traded up 0.8% for its own all-time high. $AMD, $NVDA each moved higher by about 1%, while $MSFT rose 1.3%
— TradeTips (@TradeTipsApp) August 30, 2021
The correlation between interest rates and the market is simply because lower rates give individuals and businesses more freedom to borrow money and stimulate company growth. The anticipation of such a boom in the business world turns investors to the stock market to build their portfolios ahead of expected price increases.
As long as interest rates remain low, the stock market overall will likely continue to thrive as it has under such conditions. But when the Fed starts to raise interest rates in 2022 or 2023, investors should prepare for a possible downturn in response.
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