The relationship between interest rates and stock values ...

Will stock prices be negatively affected by increasing interest rates?

Stock prices reflect the reduced present value of future cash flows. Price, then, has two components - discount and future cash flows. The discount rate typically goes hand in hand with interest rates so higher rates result in greater discounts and lower F / E's. What about future cash flows? How strong is the business's past, present and future, and more importantly, is it present in an attractive valuation based on its core values?

When I have the money to invest in common stocks, my primary focus is on the specific financial health and valuation of the individual business that I always consider. My main questions are how strong the past, present and future of the business, and more importantly, is it present in an attractive valuation based on its core values? This is often referred to as a bottom-up approach to investing. This is in contrast to a top-down approach that tries to focus on macro factors rather than micro factors.

My experience has taught me that the strongest companies with the best management teams find how to perform in all economic environments, including interest rates. My favorite companies, whether we're in a booming economy or in a recession, show profitability by including dividend growth. I do not invest in the economy, but instead try to invest in the best companies I can find when their valuations are solid or, better, when their value is low.

Therefore, I am interested in the fact that when I invest in best-of-breed companies with solid valuations, these companies have proven to be strong and successful regardless of the economic environment. To me this says a lot about the quality of companies and the skills of their management teams. Since I do not intend to directly manage these companies, I am looking for companies that I can trust that management can navigate in an ever-changing economic and climate.

I will turn my attention to interest rates and their possible effects on the overall economy. In my opinion, there is an important distinction between the economic effects of changes in interest rates, as opposed to how it may affect the valuations of the individual companies I invest specifically in. environments.

Therefore, I think it is only prudent to assess what impact future economic conditions might have on my private investment. However, I believe highly valued companies will do better when entering difficult economic environments than overvalued companies. This is just one of the many reasons why I am so focused on investing only when fair valuation or undervaluation becomes clear.

Disclaimer:

LUMIBASIS has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.