Key insights
- The author presents an analogy suggesting the stock market leads interest rates, acting as a gauge for economic health. High rates, in this view, are a response to a strong stock market to prevent overheating, rather than a direct negative influence. This perspective offers a reason why stocks can perform well even with elevated interest rates, implying continued economic momentum.
I’ve noticed a lot of confusion lately about this:
If interest rates are high, why hasn’t the stock market struggled more?
I found a paper by Guo et al., 2011 PLoSOne, which showed that the stock market and interest rates don’t always move in opposite directions. Instead, the paper suggests that the market actually leads rates rather than just reacting to them. This made me rethink the relationship.
Here’s a simple way I’ve been considering it:
- stock market = the car * money supply = fuel * inflation = excess heat * interest rates = braking system
When the economy is running hot, rates act less like a hard stop and more like a way to control speed. It’s similar to regenerative braking in an electric vehicle. You slow things down while also capturing energy and keeping the system moving. So instead of thinking rates going up must mean stocks go down, we can think of it more like rates are rising because stocks are doing well, preventing them from overheating.
This might explain why we sometimes see the stock market perform well even when rates are high. I’m curious to know whether others have thought about it similarly and how that perspective has worked for them.