2016-02 Interest rates and stock prices

Here is an article that makes some useful points about the relationship between interest rates and stock prices, and the effect of the US central bank (FED) on the world

1.Broader sentiment has swung alongside speculation over the U.S. Federal Reserve’s upcoming rate decisions

This is the second point. The FED will make its monetary policy decision next week. The main element is the short-term interest rate. Some people say it should be increases, some that it should stay unchanged.

2. Rates that remain close to ultra-low levels established during the financial crisis have helped to sustain the bull market in stocks.

Stingy bond yields have made stocks more attractive by comparison, while cheap money has encouraged investors to take on risk in general.

In other words: since 2008, interest rates have been very low. This led to low returns on bonds, making stocks relatively more attractive, and leading to a bull market in bonds.

3. Fuelling the current uncertainty are equity valuations that appear high relative to history, but are difficult to value at a time when interest rates, by many measures, have never been lower.

The problem with assessing the situation is that it wi without precedent. Yes, shares are expensive. But interest rates are at record lows. So it is hare to figure out whether shares are too expensive, too cheap or priced just right.

One thing for certain: if the FED unexpectedly increases the interest rate, share prices will fall.

Think about why the "unexpectedly" matters. What would happen with stock prices if everyone expected an interest rate increase and  the FED would, indeed, increase interest rates?