Interest rate changes take 2 years to hit stock markets, study says

There has been much discussion about what a change in interest rates means for stock markets. In general, it has been argued that the two tend to move in opposite directions.

August 1, 2006 08:02
1 minute read.


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Interest rate shifts have a substantial impact on the stock market but the full impact can be seen only after around two years, according to an international study by the investment house Green Bull of Israel Discount Bank. "Prediction estimates for the direction of where stock markets are going should focus on interest rate trends two years backwards rather than only take into consideration recent developments and changes," concluded the study by Green Bull. There has been much discussion about what a change in interest rates means for stock markets. In general, it has been argued that the two tend to move in opposite directions. For example, investors and economists view a cut in interest rates as a catalyst for expansion as businesses can finance expansion at a cheaper rate and potentially increase profitability, which, in turn, would boost stock prices. At the same time, as interest rates go up, stock markets tend to fall. Though it had been the case, that in recent months, world markets reacted nervously on a downward trend following speculation that US interest rates would continue to move upwards over the next few months, the study by Green Bull, which analyzed the impact of interest rate changes on 30 developed markets over a period of 10 years, showed that the real impact is seen only one-and-half to two years after the interest rate changes. Analysts at Green Bull explained the findings by claiming that it would take two years for the impact of the interest rate change to have a real effect on companies in terms of the time and ability to absorb and adapt to the changes. The study showed that the strongest impact of a shift in interest rates on the stock market after a delay of two years was in the US, with a correlation rate of 0.72, where 1 refers to the 100 percent adjusted correlation. Yaron Rapaport, macroanalyst at Green Bull gave the example of the US, which experienced interest rate hikes between the first quarter of 2004 and the fourth quarter of 2005. The hikes were the reason there were no significant returns from the US stock market compared with other markets over the past two years, despite positive economic indicators such as better manufacturing figures than in other markets, he said.

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