Interest Rates and the Stock Market
A Concerned Look Forward
If there is a consistent relationship between inflation, interest rates, and consumer spending, then there is necessarily also a multifaceted connection between interest rates and the stock market. Figure 13-1 illustrates this principle. Although it may come as no surprise, you will benefit by applying the ROCET method to tracking interest rates and their effects on the ebb and flow of the stock market.
Interest rates affect the stock market in two important ways: (1) by their effect on the rate of overall economic growth and, consequently, on corporate profits and (2) by their effect on stock valuations (price-earnings ratios).
In chapter 8, we saw that rising and falling ...