"When interest rates rise the cost of capital increases for all companies which then puts a damper on future purchases, since these must be funded. It is this fear that drives the market down as interest rates rise. To give an extreme example, that is why automobile manufacturers are so sensitive to consumer interest rates."
Right. I am not disputing that interest rates that are rising can put a crunch on capital spending. The example you gave about car manufacturers is a perfect example of the effect of interest rates, since most people still finance their automobile purchases. That is at the consumer level. Now lets talk about the business level.
As interest rates go up, invariably so do costs. There are two ways that a business can compensate for the short fall in profits from rising costs. 1) Charge higher prices on their products and/or services. In the long run this is fine, but in the short run, prices are sticky because consumers are very apprehensive about paying more tomorrow for the products/services that they could have bought for less yesterday (unless, of course, you are talking about the stock market :)). Then you also have to take into consideration the timing of your price increases. Your competitor may not raise prices at the same time you do, and this could cost you sales.
So, since raising prices is not acceptable in the short term, how do you cover the increasing costs, remain competitive, and maintain profits? Simple, 2)purchase technology which makes you more efficient and productive. This is why you are seeing the technology companies out perform the DOW and banking stocks today. Technology, efficiency, and productivity become almost priceless in an era of rising costs.
Wayde. |
