Q. “On Monday you mentioned you’re now expecting a Nasdaq rally. It was indicated that analysts and economists are predicting a drop in the interest rates. Could you briefly explain why a drop in interest rates will attract investors into buying stocks, which will help with the rally?”
A. There are a few reasons why markets are more likely to rally when interest rates drop in the next couple of months.
Let’s start with…
1. Cheaper borrowing for companies
When interest rates are low, it’s cheaper for companies to borrow money.
And when investors borrow money, they can use it to invest in assets, equipment, structured products, employ more people and invest in R&D.
These purchases help grow and expand the business. And this attracts investors to buy shares, which helps it rally further.
2. Higher company profits
Lower interest rates will also help reduce the cost of repaying debt for companies.
With less debt in the company, this helps boost their profits and equity.
And this makes the books look more attractive for investors.
3. Better Investment Returns
When interest rates drop, due to the lower inflation levels – this will appeal to investors.
They will most likely exit out of their interest-bearing assets like banks, money market, bonds etc…
And they will look into investing in higher return assets like stocks, ETFs and
4. More spending by consumers
Nothing drives markets more than consumers spending on their products and services.
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