A friend asked, why has the U.S. stock market been raising interest rates in recent years, and is the interest rate hike cycle over now?

How do interest rate fluctuations affect our investments?

In the past two years or so, the reasons for the rise in U.S. stock market interest rates

Interest rates fluctuate up and down, showing cyclical changes.

Generally speaking, the interest rate cycle is not long, about 3-4 years per cycle.

Taking the yield on 10-year U.S. Treasury bonds as an example,• From October 2016 to October 2018, it was in an upward cycle;

• From October 2018 to July 2020, it was in a downward cycle;

• Since July 2020 to the present, it has been in an upward cycle again.

In recent years, the U.S. stock market has entered an interest rate hike cycle, mainly because it has experienced the highest round of inflation since the 1980s.

We know that at the beginning of 2020, due to the impact of the pandemic, the global economy was relatively weak.

To stimulate the economy, the U.S. stock market significantly reduced interest rates at that time.The market has seen an influx of capital, leading to a significant increase in stock prices in the U.S., resulting in high inflation.

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Thus, in 2022, the inflation rate of the U.S. stock market, which is the year-on-year growth rate of the CPI, reached a peak of 9.1%.

In the past two years, one of the main reasons for the substantial and frequent interest rate hikes in the U.S. stock market has been to curb high inflation.

The Federal Reserve's goal is to bring inflation back down to a level of 2%-3%.

As of July 2023, after significant interest rate hikes, inflation in the U.S. stock market has been curbed and is now around 3%. Compared to the peak of 9.1% last year (2022), it has decreased considerably.Market expectations suggest that there may be 1-2 more interest rate hikes in the US stock market, but the magnitude is also expected to be relatively small.

Once the interest rate hike cycle is completely over, it is also possible to enter the next round of interest rate cuts.

Interest rate fluctuations affect the prices of various assets.

Interest rate fluctuations can impact the prices of all types of assets.

Regarding this point, Warren Buffett has made a very vivid analogy:Interest rates to assets are like gravity to objects.

In general, the higher the interest rates, the stronger the downward pressure on the prices of various assets such as stocks, bonds, and real estate.

Last year (2022) was the year with the most aggressive interest rate hikes in the US stock market, resulting in a triple whammy for overseas market stocks, bonds, and real estate.

Conversely, if the interest rate hike cycle comes to an end and interest rates begin to decrease, the prices of many assets may rise.

The relationship between interest rates and the bull and bear markets of bondsThe most typical example is the relationship between interest rates and the bull and bear markets in bonds.

For other assets, such as stocks and real estate, there are many other influencing factors besides interest rates. However, for the bond market, interest rates are its most significant influencing factor.

When interest rates are in an upward cycle, the bond market is often in a bear market. This is because the interest rate is calculated as interest divided by price. Interest typically remains unchanged in the short term; if the interest rate rises, it is usually reflected in a decrease in bond prices. A decrease in bond prices, when reflected in the net asset value of bond funds, means that bond funds also fall.Here is the translation of the provided text into English:

Below is a comparison chart of the 10-year U.S. Treasury yield and the performance of BND (Total U.S. Bond Index Fund) and TLT (20-year U.S. Treasury Bond Index Fund) over the past decade.

It can be observed that, in general, there is an inverse relationship between the performance of BND, TLT, and the 10-year U.S. Treasury yield.

- When the 10-year U.S. Treasury yield rises, BND and TLT exhibit a downward trend;

- When the 10-year U.S. Treasury yield falls, BND and TLT exhibit an upward trend.This inverse relationship was particularly evident in 2022.

At that time, U.S. stock interest rates rose sharply, and the bond market was an unmitigated bear market.

U.S. stock bond index funds also reached the largest single-year decline since 2008.

The relationship between interest rates and the stock market

Interest rate increases are also detrimental to the stock market; however, different styles are affected by interest rate fluctuations to varying degrees.

Generally speaking, interest rate fluctuations have a much greater impact on growth stocks than on value stocks.During the rising interest rate phase:

- Growth stocks tend to face greater pressure;

- Value stocks often have higher dividend yields and cash flows, and thus experience less pressure, performing relatively better.

Conversely, during the declining interest rate phase:

- Growth stocks often perform more impressively;

- The gains of value stocks might be relatively weaker.

In fact, when looking at a longer time horizon, the long-term returns of growth style indices and value style indices are roughly comparable.

However, the phases in which they excel are distinct.When it comes to investing, we should still take a look at the valuation of specific style varieties and consider investing when they are undervalued.

This is a general overview of the situation with U.S. stock interest rates and U.S. stocks and bonds in recent years.

The fluctuation of U.S. stock interest rates and its impact on A-shares and Hong Kong stocks

Many friends may be more concerned about how the fluctuation of U.S. stock interest rates affects A-shares and Hong Kong stocks.

In fact, the A-share market is primarily composed of domestic investors, and U.S. stock interest rates are hard to have a direct and significant impact on the trend of A-shares.The impact is more on the sentiment and confidence of investors.

However, fluctuations in U.S. stock interest rates can affect the exchange rate between the U.S. dollar and the Chinese yuan, thereby indirectly affecting the trends in the A-share and Hong Kong stock markets.

Moreover, this situation is mainly reflected when there are significant changes in interest rates and large fluctuations in exchange rates. If it's just minor fluctuations, the impact is often not noticeable.

The following is a comparison chart of the exchange rate between the U.S. dollar and the Chinese yuan, along with the trends of the CSI All-Share Index and the Hang Seng Index during the same period.It can be observed that when the US dollar appreciates significantly against the Chinese yuan, the decline in the A-share and Hong Kong stock markets tends to be more substantial. For instance, in 2022, when the US dollar appreciated sharply against the Chinese yuan, the A-share market was roughly in the area of a 5.4 or 5.3-star bear market bottom.

Conversely, when the Chinese yuan appreciates notably against the US dollar, the A-share and Hong Kong markets typically experience a relatively rapid rebound. This is similar to the period from October 2022 to January 2023.

Why do interest rate changes in the US stock market affect exchange rates?

Taking the most recent two years as an example, the US stock market has been in an interest rate hiking cycle, which also leads to an increase in the yields of US bonds and bank deposits.Investing in US dollar money market funds may yield a return of 4%-5%.

This could attract global liquid capital to flow into US dollar assets.

It may also lead to the appreciation of the US dollar relative to other currencies.

Conversely, if the US dollar's interest rate hike cycle ends, the Chinese yuan may appreciate relative to the US dollar.

This could also drive overseas capital to flow into Chinese yuan assets, such as A-shares and Hong Kong stocks.

This is particularly evident in Hong Kong stocks.

The H-shares and Chinese concept stocks in the Hong Kong stock market are essentially Chinese yuan assets.In the past 1-2 years, when the Chinese yuan has appreciated relatively, the performance of Hong Kong stocks usually tends to be better.

For similar reasons.

US Dollar Cycle

The above is also known as the so-called US dollar cycle.

(1) When the US dollar cuts interest rates, the market is flush with funds.(2) Capital inflows into global assets, driving up global asset prices. Investors from various countries are piling in at high levels and leveraging up.

(3) The US dollar increases interest rates due to high inflation and other reasons, leading to a reduction in market liquidity, an appreciation of the dollar, and attracting global capital to flow back.

(4) Global assets experience a decline in prices due to tightened liquidity. Some investors who cannot withstand the pressure face margin calls or are forced to sell at a loss, not being able to wait for the next round of price increases.

(5) Inflation subsides, and the US dollar's interest rate hike cycle comes to an end, moving into the next round of rate cuts.Interest rate fluctuations have little impact on long-term investments.

Facing interest rate fluctuations, what should we investors do?

In fact, interest rate fluctuations are more of a medium to short-term factor over two to three years.

Over time, it will be observed that interest rates fluctuate cyclically; there are ups and downs.

Therefore, there is no need to worry too much about the long-term impact of interest rates.

Additionally, interest rate fluctuations primarily affect market liquidity, which is the abundance of funds. And this is just one of the many factors that influence the stock market.In addition to this, stock assets are also influenced by many other factors, such as:

- Sentiment, which refers to the emotions of fear and greed among investors;

- Fundamentals, which refer to the profitability of listed companies.

Regardless of interest rate fluctuations, we simply need to focus on valuation indicators like star ratings and adhere to the investment principle of "buy when undervalued, hold when fairly valued, and sell when overvalued."

As stated in the "Records of the Grand Historian · Biography of Merchants":

When the price is extremely high, it will eventually become cheap; when the price is extremely low, it will eventually become expensive. Expensive goods should be sold like dung and cheap goods should be bought like precious jade.This is also what we have been doing.