I'm just trying to fully grasp the concept of rising interest rates (typically) causing the stock market to decline. Hoping to talk through these in an ELI5 type of format. Are these reasons/examples accurate? I highlighted specific questions in bold. Thank you guys for your help.
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With higher mandated interest rates, it costs businesses more money to take out loans. Less cash readily available from loans = less that companies can grow or take on new initiatives. Additionally, a lower ROI should be expected given that the cost for these loans is now increased. Assuming all of that is correct, what is the specific reason that banks are upping their interest rates for loans? Is it because they can simply choose to invest their cash in treasury bills at the new increased rate? And thus, it only makes sense to provide individual/business loans if the interest % is higher than that (and significantly so in order to account for risk)?
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With higher interest rates, personal investors may choose to invest in Treasury bills (very much risk-free) from the government given that the returns are now more attractive. Stocks, on the contrary, are riskier and would need significant growth potential in order to take on that additional risk. Is this true/does it play a significant role in market trends?
I'm sure there are some other factors I'm overlooking. Is this relatively accurate or am I really missing the boat? I really appreciate the help here!
Submitted October 17, 2018 at 05:42PM by clutchmasterflex https://ift.tt/2Pa2HR6
