If the rate hike is appropriate this year and later, what should happen to the stock prices, and the market as a whole? Well, if cash flows are not going to change the prices should fall. At least, the intrinsic value of all cash flow generating assets should fall. If they don't, it would mean that prices are expensive for a buyer.
While bond prices adjust pretty quickly to the changes in interest rates, it is not going to be as easy as it sounds for equities. This is because at least for individual firms the cash flows pattern and their growth rate could be different. There aren't fixed coupons to be paid out and the time line is perpetuity.
There would also be flow of capital from let's say emerging markets where interest rates are much higher back to the US. Since the rate hikes are going to be gradual, to come back to what we can call the normalized interest rate (and inflation) environment it could still take several years. In the meantime, currency-based investments may still not be the best option. So for investments in the US, equities should remain favorites.
Nevertheless, interest rate is an important factor in making decisions about allocating capital. It measures our opportunity costs in investment options.
There would also be flow of capital from let's say emerging markets where interest rates are much higher back to the US. Since the rate hikes are going to be gradual, to come back to what we can call the normalized interest rate (and inflation) environment it could still take several years. In the meantime, currency-based investments may still not be the best option. So for investments in the US, equities should remain favorites.
Nevertheless, interest rate is an important factor in making decisions about allocating capital. It measures our opportunity costs in investment options.
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