How interest rates effect the stock prices and the crypto market? Here is the correlation between, from 2019 to 2022
While interest rates are changing too often due to multiple crisis nowadays, I wanted to build an investment portfolio and I thought making a research about the relevancy between common asset prices and the interest rate changes would be helpful.
Disclaimer : The article you are about the read shows no real academic conclusion and nothing should be affected by this article. This is my observations only.
Interest rates can have a significant effect on asset prices. In general, when interest rates are low, the prices of assets such as stocks and real estate tend to be high, because they provide a relatively attractive return compared to other investments that have low interest rates, such as cash or bonds. On the other hand, when interest rates are high, the prices of assets such as stocks and real estate tend to be low, because they provide a relatively low return compared to other investments that have high interest rates, such as bonds or certificates of deposit.
Another way that interest rates can affect asset prices is through their impact on the overall level of economic activity. When interest rates are low, borrowing costs are also low, which can stimulate economic growth and lead to higher asset prices. On the other hand, when interest rates are high, borrowing costs are also high, which can dampen economic growth and lead to lower asset prices.
So, in a normal economy, higher interest rates mean lower financial asset prices like stocks, bonds or crypto currencies*. There are a lot of articles about that and some of them are really well supported. Here in this article, i will look into FED’s interest rate decisions, Turkiye’s interested rate decisions and the stock market price changes depends on that decisions.
Changes in interest rates can have an impact on the stock market, but the relationship between these two factors is complex and can vary depending on market conditions and other factors like
– Corporate performance
– Economic Conditions
– Interest Rates
– Market sentiment
– Political Issues
and interest rates are really a big part of this, especially if the attention to the decision is bigger than the normal. (the example is at *A ) In this article, I am going to calculate correlations between common stocks and the interest rate changes.
Correlation is basically a statistical measure that expresses the extent to which two variables are linearly related. By calculating that value we end up getting a result between 1 and -1.
+1 means perfect positive correlation and -1 means perfect negative correlation. so anywhere between 1 and 0 means it is directly related and anywhere between 0 and -1 means the inversely related.
So I collected the data for the assets listed below for January 1 2019 to 25 November 2022
- NASDAQ 100 (NDX)
- S&P 500 (SP500)
- DOW Jones (DJIA)
- Market Yield on U.S. Treasury Securities at 2-Year Constant Maturity (DGS2)
- Turkiye’s 2-year Market bond yield for the interest rate (TR2YT)
- BIST 100 (XU100)
- Bitcoin (BTC)
Things are simple when the expectations match up with the decisions like what FED is doing, but things getting interesting when the decisions are not matching up with the expectations like what Turkish Central Bank is doing nowadays (2022).
Here are the results:
NASDAQ 100 vs DGS2 :
as we can see on the chart we can assume that they have inversely correlation.
NASDAQ 100 vs DGS2 correlation is -0.2958 , that suports they are inversely proportional.
BTC vs DGS2
as we can see on the chart there is also inversely correlation here.
BTC vs DGS2 correlation is -0.3028 that means math supports the thought.
S&P 500 vs DGS2
01.01.2019 – 11.25.2022
well, it looks like negative related.
S&P 500 vs DGS2 correlation is -0.1144 not as strong as the others, but still.
Here’s the fun part,
Turkiye’s Interest Rate vs BIST100:
BIST 100 vs TR2YT correlation for 01.01.2019–11.25.2022 is -0.02718 which is really low number, and actually that’s not pretty usual.
Did you see anything remarkable?
Yes, the last 6 months seems like strongly inversely related. Is it?
*A :When we go about the Turkiye’s current status, for last 6 months the central bank of Turkiye keeps decreasing the interest rate insistently even the inflation is above %80 and most investors and economists tells the otherwise. That means there is more attention from everybody on the decision of the central bank than the normal.
So I calculated the correlation between these specific dates
BIST100 vs TR2YT correlation for 05.06.2022–11.25.2022 is –0.8923 which is really powerful number.
That shows us in some certain times, interest rates may effect the asset prices more then market expects. But we should always consider that there are a lot of other variables that effect the prices.
What about mortgage?
Changes in interest rates can have an impact on mortgage rates, which can in turn affect the housing market and the broader economy. When the Federal Reserve, which is the central bank of the United States, raises interest rates, it becomes more expensive for banks to borrow money. As a result, banks may raise their own interest rates, including the rates that they charge for mortgages. This can make it more expensive for consumers to borrow money to buy a home, which can in turn slow down the housing market.
When the Federal Reserve lowers interest rates, it becomes cheaper for banks to borrow money. This can encourage banks to lower their own interest rates, including mortgage rates. This can make it cheaper for consumers to borrow money to buy a home, which can in turn stimulate the housing market.
At the end, interest rates are not the major factor effecting most of the financial assets. But definitely has a potential being that way in some specific circumstances.
*I am aware of crypto currencies are not considered as a financial assets but intangible. Or whatever you want to call them since they are still not regulated in a decent way.
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