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Why We Are Seeing Declining Rates Lead To Higher Stock Prices Right Now

financial advisor robert stoll cfp cfa chief investment officer draft commentary Profile AboutWhy We Are Seeing Declining Rates Lead to Higher Stock Prices Right Now

On Thursday, September 12, the European Central Bank cut interest rates and re-activated its program to buy government bonds. The Federal Reserve is expected to cut interest rates at its next meeting this month. Both of these moves are to help “stave off” an economic slowdown. As a result, stock indexes here in the U.S. and Europe are sitting near 1-year highs. These declining rates are leading to higher stock prices right now.

Why do stocks love lower interest rates so much?

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[S&P 500 vs. 10-year U.S. Government Bond Yield]
The very simple answer is that as interest rates go down, global investors seek better returns somewhere else. That somewhere else has been in stocks. 

You’ve likely heard or seen news about how some interest rates in Europe are even negative.

When faced with a choice of losing money or taking their chances in the stock market, these global investors are obviously deciding to take their chances in stocks! 

Does it always work this way, where lower interest rates always lead to higher stock prices?

Not necessarily. If the economy is heading into recession, stocks tend to do poorly even though central banks are cutting interest rates. The fear of a recession’s consequences for stocks out-weighs the fact that bonds have lower and lower interest rates.

In troubled times, investors will seek the safety of government bonds, and U.S. government bonds in particular. That’s why it’s critical to have a balance of both stocks and bonds in your portfolio. Bonds may hurt your portfolio returns a bit when stocks are surging to new highs every day. But when stocks go through a bear market, those same bonds help protect your portfolio from going down as much as the stock market. 

Keeping the right balance in your portfolio is what we do for clients. That way you can sleep well knowing that someone is watching your investments closely. 

Wondering how this affects your investments? Schedule a call with Michelle and Steve to discuss your portfolio today.

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