More folks are writing, as I did last week, about the effects of higher long-term interest rates on stock prices. Here’s investment professor Jeremy Siegel:
I believe that stocks will pause in their upward movement, but perhaps will fair better than most of the other asset classes. In particular of course, bonds are going to be directly impacted by higher interest rates. They go down in price right with higher interest rates. But I also think that it will negatively impact real estate, and I think that the housing recovery is going to be stalled by the increase in rates.
You can listen to an interview with him or read a transcript here. (You know you’re reading a transcript when a smart guy like Siegel is quoted using "fair" instead of "fare."
Let’s elaborate a bit about how come higher interest rates don’t always sink stocks. (Nutshell of my previous post: stocks go down almost half the time long rates are rising; average increases are three percent when long rates rising, versus 12 percent at other times.) Why are there some occasions when higher long rates don’t sink stock prices? Because sometimes the higher long rates are a result of a growing economy. That pushes up long rates, even independently of an increase in inflationary expectations. And at the same time, the strengthening economy pushes up corporate profits. So it’s not such a mystery.
At other times, long rates rise because of inflationary expectations, or foreign factors, and corporate profits are not helped at the same time. In these cases, you have a present value equation with an increase in the denominators going forward, lowering stock market values.