Low Interest Rates

• If you have investable cash, you are not likely to be satisfied with the low interest rate that you get on your money at the bank. You are likely to seek a higher return, and your quest may lead you to stocks that offer a higher return potential. You may decide to take more risk with stocks than to stay in cash and earn next to nothing. So would many other investors who would typically favor stocks in a low-interest-rate environment.
  
  

High Interest Rates

• If interest rates are high, you may be happy earning high interest on your money market or bank balances and more reluctant to take risks in stocks. So would many other investors. When interest rates are high, investors either stay in cash (or cash equivalents), satisfied with the safe returns, or demand greater compensation for risk in equities by shunning stodgy conservative stocks that do not move much.
  
  

Rising Interest Rates

• Interest rates are the price of money. They go up when the demand for money from businesses and consumers is rising -- businesses are looking to borrow to expand; consumers are looking to borrow to make major purchases such as houses and cars. Rising interest rates typically coincide with periods of economic expansion when company earnings are strong and stocks are rising. Investors generally feel optimistic about the future and are willing to risk money in stocks. However, at some point rising interest rates get too high, making it harder to borrow; businesses and consumer borrowing (and spending) slows down. Company earnings may suffer as a result. Investors that understand this cycle typically start selling stocks after several interest rate hikes in anticipation of a slower economy and lower corporate profits.
  
  

Falling Interest Rates

• Falling interest rates mean less interest income for investors who have gotten accustomed to high rates of return in bonds and certificates of deposit (CDs). When their fixed income investments mature, investors start "chasing the yield" -- looking for alternative investments that will replace the lost income, which often means rolling the maturing investments into longer maturities or lower-quality bonds that pay higher interest.