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The Morning After (Interest Rates and Stocks)

Posted May 06, 2022

The Morning After (Interest Rates and Stocks)

Welcome to the day after the worst day for stocks since 2020 – at least, for the Dow and Nasdaq it was.. (And that’s saying something.) 

By the time the closing bell mercifully rang yesterday afternoon, the Dow finished down 3.12%, the Nasdaq lost 5% market cap and the S&P 500 Index had its second-worst day of 2022, down 3.6%. 

All this came after the Fed raised short-term interest rates a half-percentage point Wednesday. Thus, we thought it would be helpful for some perspective from our retirement-and-income specialist Zach Scheidt. 

“I want to explain why higher interest rates can hurt stock prices so you'll understand what's going on below the surface,” he says. 

“While traders often make emotional decisions based on fear and greed, much of Wall Street relies on mathematical formulas to find the ‘fair market price’ of individual stocks.

“The most important formula Wall Street uses is called the discounted cash flow (DCF) method,” he says. 

Send your opinions to, TheRundownFeedback@StPaulResearch.com

Your Rundown for Friday, May 6, 2022...

Profits: Here today, gone tomorrow 

“The DCF analysis operates under the time value of money principle,” says an article at The Hartford. “This concept assumes that money is worth more today than it is in the future. 

“If you’re going to spend $100 dollars to buy something,” for example, “you’re going to want to know how much money you’ll get in return and what that money will be worth in the future. And that’s where the Discounted Cash Flow method can help.” 

“Put simply,” says Zach, “the higher the interest rate, the less value we put on future earnings. This is particularly troubling for companies that don't generate earnings today but should in the future… 

“Not only are those future profits at risk if the economy pulls back, but they're also not in your pocket today — when you’d benefit from higher interest rates.” At the same time, “inflation is making future profits worth less and less each day.

“Fortunately, there’s a great solution: Invest in companies that are making profits today,” Zach says, “preferably companies that benefit from higher inflation and higher interest rates.”

  • Stocks in the energy sector are benefiting from inflation…
  • Bank stocks make more money when interest rates rise (but it's been a mixed bag recently)…
  • And companies that mine gold and precious metals are making bigger profits as prices start to rise.

“Higher interest rates will naturally cause Wall Street ‘formula followers’ to favor companies that generate current profits over companies that hope to make profits in the future,” says Zach. 

“And that's exactly why stocks of stable companies are holding up right now while speculative tech stocks are moving steadily lower.

“It's an important concept to keep in mind as you decide which stocks to hold on to and which ones to avoid,” Zach concludes. “Interest rates are likely to rise for years to come. So please make sure you’re invested in companies that are profiting today.” 

Market Rundown for Friday, May 6, 2022 

S&P 500 futures are down 0.65% to 4,117. 

Oil’s up almost 1% to $109.10 for a barrel of WTI. 

Gold’s churning at $1,875.40 per ounce. 

And Bitcoin’s down $140 to $36,000 at the time of writing. 

Send your comments and questions to, TheRundownFeedback@StPaulResearch.com

We hope you have a great weekend… Talk to you Monday. 

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