Higher interest rates aren’t necessarily bad for stocks, MktwHulbert writes.
Take the notion that higher interest rates are bad for the stock market, which is almost universally believed on Wall Street. Plausible as this is, it is surprisingly difficult to support it empirically.
If higher interest rates were always bad for stocks, then the Fed Model’s track record would be superior to that of the earnings yield. Money illusion These results are so surprising that it’s important to explore why the conventional wisdom is wrong. That wisdom is based on the eminently plausible argument that higher interest rates mean that future years’ corporate earnings must be discounted at a higher rate when calculating their present value. While that argument is not wrong, Richard Warr, a finance professor at North Carolina State University, told me, it’s only half the story.
Investors were guilty of inflation illusion when they reacted to the Fed’s latest interest rate announcement by selling stocks.
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