US Federal Reserve raises interest rates: How does this affect the stock market and is it a bad sign for investors?

US Federal Reserve raises interest rates: How does this affect the stock market and is it a bad sign for investors?

According to a report by www.test.de,

The US Federal Reserve announced a further interest rate increase of 0.75 percentage points on September 21st. This is the fifth rate hike this year; the Fed's target rate is now between 3 and 3.25 percent - and further rate hikes may follow. The US stock market fell after the recent interest rate hike.

High interest rates are often seen as poison for stocks because rising interest rates can lead to falling stock prices. Possible effects are that financing companies becomes more difficult, which can lead to lower growth prospects and thus falling share prices. Rising interest rates could also reduce consumer spending by private households, which in turn could lead to falling corporate sales and lower stock prices. In addition, investors could shift their money from stocks into interest products, which could also put pressure on stock prices.

Historical analysis shows that over the past 30 years, falling interest rates have tended to go hand in hand with rising stock market valuations, with the exception of the crisis-filled noughties. Drastic interest rate increases like this year have not been seen for a long time. In the short periods of rising interest rates since 1980, equity valuations have tended to fall. Investors must therefore prepare for rather subdued price increases on the stock markets if interest rates continue to rise.