Why Do Markets Fall On Rate Hikes By The Banks

This post was sent as a newsletter to my subscribers on Monday, 22-Aug-2022. The topic is – Why Do Stock Markets Fall On Rate Hikes By The Banks?

I wrote this topic because today (22-Aug-22) there was a fall in stock markets:

Image source: Rediff.com

The reason for this fall?

Reason 1: Central bankers worldwide including in India are aggressively doing rate hikes – this in turn is pushing the markets into negative territory. Source: https://www.businessinsider.in/stock-market/news/markets-are-entering-an-era-of-global-multi-year-interest-rate-hikes-to-combat-inflation-societe-generale-says/articleshow/93645531.cms

Reason 2: There is recession fear in China. Source: https://www.bloomberg.com/opinion/articles/2022-08-16/if-the-china-crisis-deepens-a-global-recession-will-be-much-harder-to-avoid

One cannot be sure how much will the markets fall but this is a valid enough reason for fall. When the fall reaches a level where the buying becomes comfortable or good news will hit – suddenly buyers will take over and the markets will start to rise. This is the life of stock markets.

Coming back to the topic – why do stock markets fall when there is a rate hike by banks?

Stock markets are known to give a return of 10-12% compounded annually. Fair enough, but it comes with risk and no guarantee that an investor will make this return every year. But what is a guaranteed return is the money kept in Fixed Deposits in a bank.

When the banks start increasing or hiking interest rates everything goes up – the EMIs of loans and the returns an investor gets in a Fixed Deposit. Now, what if the guaranteed return promised by the banks comes close to the return from the stock markets? Isn’t it obvious that stock market investors will take money out from equities and move to Fixed Deposits in banks?

This is what is happening now. Please note that movements due to news is for the short term only. Once the news becomes old and a new one hits, if good – the stock markets will move up again and if bad it will keep moving further down.

Though this post is short I have explained why stock markets keep going up and down in the short term. However in the long run the stock markets will move up and will generate good returns for patient investors. So if you are a long-term investor please do not panic – hold to your investments and get rewarded in future.

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