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Investors could be pressured in Fed’s interest rate hike

Investors and Federal reserve
Investors and Federal reserve

Big U.S. companies increase their shareholders’ returns through “buy back”. This has been an unswerving rule for many years now, in which, investors has their own part of the share too.

But somehow, in this year, companies were able to anticipate that buybacks incur higher interest rates as indicated in the S&P 500 stock index. The Federal Reserve is expected to increase interest rates at the end of their December 15-16 meeting after nearly ten years without a raise.

According to David Joy, chief market strategist at Ameriprise Financial in Boston, “a quarter of a percentage point is not going to make much of a difference. However, as the Fed keeps raising rates, those companies borrowing money to buy back their shares will likely be hurt the most”. This means that those companies who extend their borrowing will find it harder to finance their investments which are highly proportional to its purchasing ability.

It is known that “buying buy back shares perks up stock prices in two ways: it increases the demand for a specific stock, setting a floor under its price, while at the same time, reducing the number of shares in circulation, thus, increasing the dollar value per share”. Increasing interest rate holds too much pressure towards shareholders or companies who are practicing buy backs.

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