Question

You have noticed that investors tend to invest more heavily in stocks after interest rates have declined. You are considering this strategy as well. Is it rational to invest more heavily in stocks once interest rates have declined?

Answer 1

Stocks in general are sensitive to the changing interest rates but certain stocks are leveraged to the interest rates because of their business model. Stocks with low rates mean lower interest rates expenses on the borrowed capital. This can result in high income level as the overall cost of capital is less.

Similarly, homebuilders also see a reduction in their share prices when the interest rates rise. This is because rising interest rates imply high mortgage rates which can translate into few home purchases.

Hence when the interest rates fall, consumers & companies would increase their spending which can result in stock prices to increase.