<p>It's worth starting by noting that when we talk about what the stock market does, we're talking about something we believe, not something that's necessarily true.
That said, we believe long term interest rates are correlated with economic growth. If the growth rate decreases, the P/E multiple of the market has to go down (because earnings growth is in the numerator of a discounted earnings stream, and earnings growth will be related, over the entire market, to overall economic growth). Also, when companies finance by borrowing, which they all do, earnings will be lower if interest rates are higher (for each non financial company, in this case). Finally, higher interest rates make financial assets other than equity more appealing, although I personally think that effect is far smaller than the earnings effect. </p>

CC BY-SA 3.0
2015-07-03T16:36:02.043Z
2015-07-03T16:36:02.043Z
user164740
<p>Many organisations <em>borrow</em> money to purchase shares (trading on margin). Their enthusiasm for doing this will depend on the interest rate. So lower interest rates means more borrowing for purchasing shares, which means prices rise.</p>

<p>A similar thing happens with other stuff that people tend to buy with borrowed money - like housing.</p>

CC BY-SA 3.0
2015-07-03T13:51:00.950Z
2015-07-03T18:01:01.783Z
2015-07-03T18:01:01.783Z
Mick
<p>What correlation is there between (1) long-term interest rates and (2) the stock market valuation? Please provide a simple intuitive explanation. </p>

<p>For example, as I understand it from <a href="http://www.nytimes.com/2015/05/13/business/daily-stock-market-activity.html" rel="nofollow">recent news reports</a>, rising long-term interest rates put pressure on the stock market. Why?</p>

<interest-rate><stock-market>
Long-term interest rate and stock market correlation
Gruber
# Long-term interest rate and stock market correlation

(Asked by: username_0 on 2015-06-16)

What correlation is there between (1) long-term interest rates and (2) the stock market valuation? Please provide a simple intuitive explanation.

For example, as I understand it from [recent news reports](http://www.nytimes.com/2015/05/13/business/daily-stock-market-activity.html), rising long-term interest rates put pressure on the stock market. Why?

**Tags:** interest-rate, stock-market

---

## 2 answers

### Answer by username_2 on 2015-07-03. Score: 3 | Accepted answer

Many organisations *borrow* money to purchase shares (trading on margin). Their enthusiasm for doing this will depend on the interest rate. So lower interest rates means more borrowing for purchasing shares, which means prices rise.

A similar thing happens with other stuff that people tend to buy with borrowed money - like housing.


---

### Answer by username_1 on 2015-07-03. Score: 1

It's worth starting by noting that when we talk about what the stock market does, we're talking about something we believe, not something that's necessarily true.
That said, we believe long term interest rates are correlated with economic growth. If the growth rate decreases, the P/E multiple of the market has to go down (because earnings growth is in the numerator of a discounted earnings stream, and earnings growth will be related, over the entire market, to overall economic growth). Also, when companies finance by borrowing, which they all do, earnings will be lower if interest rates are higher (for each non financial company, in this case). Finally, higher interest rates make financial assets other than equity more appealing, although I personally think that effect is far smaller than the earnings effect.


---

