How Interest Rates Will Affect Stock Markets

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The stock markets are unlikely to continue their bull run of the past year in 2022 with investors eying other opportunities as interest rates rise, according to Wharton finance professor Itay Goldstein. Federal Reserve officials last week projected at least three quarter-percentage-point rate increases next year, signaling their concern over rising inflation. The Fed also stated that it would reduce its asset purchases next year as part of a tighter monetary policy…

Goldstein said the steep rise in stock prices this year pointed to a dearth of investment opportunities. “People don’t have many places to put their money,” he noted. “The interest rates that they can get on risk-free investments are low, so they continue to look for investment opportunities and they put their money in the stock market. They put their money in real estate. They start looking for all sorts of other investment opportunities [such as] cryptocurrencies and NFTs (non-fungible tokens, which are digital assets that represent real-world assets). Across the board, prices are high, and people are just looking for more and more investment opportunities.”

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Goldstein said concerns over inflation will continue to fuel volatility in the stock markets in the year ahead. “Some of the uncertainties about inflation are playing into what we see in the market,” he said. “We’re going to continue to see a bumpy ride, but with a pretty high level of risk given the high levels of prices overall.”

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