What Causes Stocks to Fall When Interest Rates Rise?
The main US stock markets have seen a sharp decrease while US Treasury rates have risen quickly. According to the conventional discounted cash flow model, increasing interest rates lower the net present value of future cash flows. Companies with heavy debt loads and little to no profitability often experience the most significant losses when interest rates rise.
A DYNAMIC MACRO ENVIRONMENT
Risk assets have found the year 2022 to be a challenging one for the most part. The Nasdaq 100, which dominates the US stock market, has dropped over -30% this year (if not more). There has been a lot of accusatory pointing. The Russian invasion of Ukraine or the Federal Reserve’s mistakes about inflation is to blame. Or the substantial financial investment made during the early months of the epidemic; or China’s zero-COVID plan, which upended the global supply chain.
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