The global stock market has been feeling the pressure of higher interest rates in recent weeks. This has been particularly evident in the U.S., where the S&P 500 and other major indices have been languishing, causing equity investors to take deep breaths and adjust their portfolio strategies.
Analysts point to a variety of factors contributing to the downturn, including doubts around corporate earnings expectations, the US-China trade war, political uncertainty and other geopolitical issues. All of this has created a bearish mood in the markets, with many investors shifting towards safe-haven assets like government bonds and gold.
However, one factor that often gets overlooked is the effects of rising interest rates. Higher rates increase the cost of borrowing, and therefore can reduce the amount of investments that companies can make. This can impact their stock prices and the performance of the entire market.
Interest rates have been on the rise in many countries across the globe in recent months, as central banks look to rein in inflation and stimulate economic growth. The US Federal Reserve has increased rates four times in 2018 and is expected to raise rates twice more in 2019.
The impact of rising rates has been particularly notable in the US, which has the largest equity market in the world. When interest rates are rising, investors tend to move away from equities and towards safer investments, reducing demand for stocks and exerting downward pressure on prices.
Moreover, higher rates mean increased costs for companies that rely on borrowing to finance operations and investments. This can put significant stresses on already strained corporate balance sheets, limiting their ability to remain competitive and expand. This can be particularly damaging to emerging markets that rely heavily on foreign investments.
For now, investors will likely remain cautious in the near-term, as rising interest rates continue to limit the potential for risk-taking. However, the impact of higher rates should begin to abate over the next few months as central banks begin to look for opportunities to reverse the recent tightening. Until then, it appears that stock markets around the world will continue to feel the pressure of higher rates.