Market wrap: Are interest rates friend or foe?

Homeowners who are suffering from mortgage stress may not have had a good night's sleep on Monday, given the impending RBA decision on interest rates on Tuesday. But the good news came with a sigh of relief, as the RBA decided to keep interest rates on hold after 10 straight rises.

Rising interest rates can be positive, especially for the share market, as there is often a correlation between interest rates and how the stock market performs. That said, the direction and strength of the correlation will depend on various factors, which may not always be evident or even consistent.

In general, when interest rates are low, investors tend to chase higher yields, which encourages them to seek higher returns from the stock market in the form of dividends. This increased demand, in turn, can drive up stock prices, especially in some of our bigger stocks paying above-average fully franked dividends.

A low interest rate environment also makes it cheaper for companies to borrow money, so they can stimulate business growth, which ultimately increases their stock price. As such, you can see the benefit that a low interest rate environment can have on the stock market.

On the other hand, when interest rates are high, it can make borrowing more expensive for both consumers and businesses and this leads to lower spending and economic activity, which is what the RBA has been hoping for as it tries to rein in inflation. This can negatively impact corporate earnings and lead to a decline in stock prices, although we are not really seeing this in the current environment, which suggests that interest rates are not overly high.

Often the RBA overshoots the mark on interest rates which is why it becomes a balancing act of not having rates too high to stifle growth, while at the same time keeping inflation in check. Time will tell if they have got the balance right this time.

For investors, it's important to note that the relationship between interest rates and the stock market is not always straightforward. There are many other factors that can influence stock prices, such as a company's performance, economic indicators, geopolitical events, and investor sentiment. I think right now the RBA has it right and that we will see good growth in the Australian stock market over the coming year, but again only time will tell.

The best and worst performing sectors this week

The best performing sectors include Information Technology up more than 3% followed by Energy and Consumer Discretionary, which are both up more than 2%. The worst performing sectors include Materials down more than 2% followed by Utilities, which is just in the green and Financials up more than 1%.

The best performing stocks in the ASX top 100 include Evolution Mining up more than 7% followed by AMP and Northern Star Resources, as both are up more than 5%. The worst performing stocks include Allkem and Pilbara Minerals, which are both down more than 5% followed by BHP and Fortescue, as both are down more than 4%.

What's next for the Australian stock market

Last week the Australian stock market rose strongly closing higher every day and ending the week up 3.30%. The beginning of this week was very similar with the market rising strongly on Monday, however, given it is a shorter week with Easter, the bulls were more cautious with the market only rising slightly on Tuesday and Wednesday. It is now eight straight trading days in which the All Ordinaries Index has closed higher, therefore, it would not surprise me to see a few down days.

Next week is also a short week and I would expect volumes and volatility to be slightly lower. The exciting part about what is unfolding is not what the market has achieved over the past eight days, but what it will do in the next week, as this will set the tone for the coming month.

If any move down in the next week is short lived in both time and price, then it will signal the bears have gone into hiding. If this is the case, the bulls will push our market higher in the coming four to six weeks with the market is likely to rise up to 7800 points or higher.

As I continue to say, I recommend investors be patient, as they will be more than rewarded when we get confirmation that the bull market has returned. I suggest investors look at the top 20 stocks on the market, as several look like they are setting themselves up for a nice run, but remember, we need to wait for confirmation that the bull run has returned.

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