Looking at stock returns over very long periods reveals two key determinants of price: Earnings and interest-rates. While everyone will probably agree that earnings are important, many find the relationship between interest-rates and stocks to be confusing. Many believe that low-interest rates now are causing stocks to be bid up too aggressively and fear that the possible end of quantitative easing by the Federal Reserve could lead to a correction in the S&P 500 (SPY) or even a new bear market.
At a meeting with a client last week, we discussed the dynamics of QE possibly ending soon, and it was a somewhat heated debate. Reasonable people will arrive at different conclusions on this topic. While I certainly acknowledge that rising rates might have a negative psychological effect on stocks over a very short period of time (and I do think that rates will rise), I believe that rising rates, if they reflect improving economic growth, are what we should hope for!
Why Interest-Rates Are Important
READ MORE at Seeking Alpha