This week, the Federal Reserve raised interest rates, but technology stocks actually rose for two days. What is the relationship between interest rates and stock prices On Wednesday, the Federal Reserve raised the federal funds rate by 25 basis points, with a target range of 3.75% to 4%, marking the first rate hike since 2023, with 12 unanimous votes in favor On the day of the interest rate hike, the market remained almost unchanged. In the following two days, Nasdaq rose from 25978 points to 26522 points, an increase of 2.1% According to textbooks, when interest rates rise, stocks should fall. The result is the opposite Give me a short answer first. The interest rate controls the gravity of valuation, the longer the time, the more effective it becomes, and the shorter the time, the less effective it becomes Open it up and say. The value of a company is equal to its future cash flow, divided by a discount rate. When the interest rate and discount rate increase, the denominator becomes larger, and the reasonable price calculated for the same cash flow is lower. This line stretches for ten or twenty years, no one can hide from it But the market trades on expectations. The idea of raising interest rates by 25 basis points was traded off a month ago. On the day of the announcement, the hanging matter came to fruition, but it turned out to be all negative. So it's not surprising that short-term stock prices and interest rates often go against each other To understand this slow variable, you have to look at the December 2022 article 'Sea Change'. It's about how the long-term direction of interest rates determines a generation's way of making money Its skeleton is like this. In 53 years of dry investment, we have seen cycles, mania, panic, foam and collapses. There are only two times that really count as the turn of the times, and the third time is in progress The first shift occurred in the 1970s. Legislation has opened the door to high-yield bonds for ordinary investors, turning buying junk bonds from an unseemly business into a legitimate one. As the brain changes, risk shifts from something that must be avoided to something that can be priced, bought and sold, and borne There is a tough battle in between. The oil embargo from 1973 to 1974 ignited inflation, causing oil prices to jump from $24 to $64 per barrel in a year. CPI rose from 3.2% in 1972 to 11% in 1974, and remained at 13.5% in 1980. Volcker raised the federal funds rate to 20% in 1980, and it wasn't until 1983 that inflation was pushed to 3.2% The second turn was much quieter. The federal funds rate dropped to a high single digit level in the late 1980s, fell to the mid single digit level in the 1990s, and the environment of declining interest rates over the past forty years began here How fat this market is, the S&P 500 rose from 102 points in August 1982 to 4796 points at the beginning of 2022, with an annualized return of 10.3%. The biggest luck in my investment life is to catch up with these forty years The reason is not complicated. Low interest rates are a cheap medicine. Consumers borrow money to consume cheaply, companies borrow money to expand cheaply, and asset valuations rise accordingly. This medicine was kept on from 2009 to early 2020. After the pandemic brought the economy to a halt, the Federal Reserve increased the size of its crisis rescue plan within a few weeks and repeated it again. The last time it was used, it took several months Medicine cannot always be cheap. When interest rates rise, people demand higher returns, and the reasonable value of stocks decreases. This is arithmetic The future given by that judgment is these few There will be a recession in the next 12 to 18 months Corporate profits and investor sentiment have both deteriorated The default rate will rise Interest rates will not drop by 2000 basis points from their current position The most deadly thing is that the playing style that has been effective in the past 13 or 40 years may no longer be the winning one in the coming years Three years have passed, and this is how the accounts are settled The direction of interest rates is correct, but the difference in magnitude is significant. The federal funds rate peaked at 5.33% in August 2023 and has since dropped to 3.63% in August of this year, totaling 170 basis points, which is one order of magnitude lower than 2000 basis points. Adding back 25 basis points this week, it is now around 4%, which is still over 100 basis points lower than the peak in 2023 The recession has not arrived. The recession index of the National Institute of Economic Research is still 0 to this day The stock market is the most impolite. The S&P 500 has doubled in three years, from 3817 points on December 19, 2022 to 7637 points this week Out of three, one was correct, one was wrong, and one was slapped in the face What's the use of this thing left. The rest is the slow variable. Interest rates determine valuation, prices determine fate, and when the environment changes, tactics must be changed. These three sentences do not depend on the year Returning to the question at the beginning. Why can technology stocks rise on the day of interest rate hike? Because they trade on expectations and emotions. And the value of stocks in the next decade will be determined by the long-term direction of interest rates These two things are established simultaneously and not contradictory. Only those who mistake the time scale will feel contradictory The only constant is change. When the environment changes, the strategy also needs to be changed This tweet is supported by @ MSX_CN Maitong - Allow high-quality assets to circulate freely