The Fed Is a Poor Guide for Stock Investors
The S&P 500 usually rises whether the central bank is raising or cutting rates. There are more reliable ways to decide on portfolio allocations.
Never mind the Fed.
Photographer: Michael Nagle/Bloomberg
The Federal Reserve is widely expected to begin cutting interest rates this week as moderating inflation allows the central bank to roll back some of its previous rate increases. I expect that some investors will be tempted to chase stocks given the stubborn conventional wisdom that interest rates and stock prices move in opposite directions. They should reconsider.
The theory is that stock prices reflect the present value of companies’ future earnings, a calculation that relies in part on prevailing interest rates to “discount” future earnings to the present. As the math goes, the lower the interest rate, the more future money is worth today, and vice versa. By extension, growth stocks should be more sensitive to interest rates than value ones because faster-growing companies generate more earnings in the future.