This does not always mean the market will dive on the day the announcement is made. Corporate plant expansions and capital equipment purchases also decline. Over time, fewer purchases reduce production demand, corporate earnings, and consequently stock prices in the auto, home products, construction, and capital goods sectors. Unemployment subsequently increases. Banking, financial, and credit card stock prices are hit hard.
Debt defaults increase and overall consumer spending drops as unemployment increases.
This depresses stock prices in bank, credit card, and discretionary consumer products sectors. Banks are hit doubly hard since earnings decline as the cost of funds increases and as consumer defaults increase. The dollar strengthens when interest rates increase. For countries such as Japan, the EU, and the UK, trade deficits with the US will increase as the relatively cheaper imports increase and US exports decrease. Increased exports to the US stimulate local GDP, tax revenues, and employment.