What Do Long Term Interest Rate Trends Say About Future Stock Market Performance?
When looking at the ‘value’ of any asset, whether it be cash, equities, fixed-income, gold, or real estate, interest rates are a major determinate. If interest rates are very low, holding real estate, gold, equities, and older fixed income become advantageous. An investor is not ‘giving anything up’ when holding these other assets, since holding cash yields nothing. Also when projecting future NPV values with a very low interest rate, values get inflated since there is little opportunity cost. The opposite, is of course also true. If interest rates are very high, equities get less attractive on a risk adjusted basis, real estate values should go down (all else equal) as mortgage rates go up, and gold becomes unattractive as no interest is earned on the metal. Meanwhile owning newly issued fixed income and cash become better ‘low risk’ stores of value. But what are more important, current interest rates or future interest rate trends? My opinion is future trends. Look at the following c
