Secular Changes in Interest Rates
I really like the way this chart, by Joseph Ellis, presents this information:
Long-term interest-rate changes and the stock market
click for larger graph
Source: Ahead of the Curve
>
Ellis observes:
Because of the inverse relationship between interest rates and stocks’ price-earnings ratios, rising interest rates from 1960 to 1982 contributed to a compound annual appreciation of only 2.9% in the S&P 500 Index.
Conversely, falling interest rates from 1982 to 2003 were a major long-term stimulus to the stock market, helping produce compound annual growth in the S&P 500 of 10.5%. Note that bear markets from 1960 to 1982 were more frequent and longer, whereas from 1982 to 2003 they were less frequent and shorter in duration.
Thursday, February 16, 2006 | 09:00 AM | Permalink
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While this observation makes intuitive sense, it's only one data point, so, strictly speaking, the implied causation may be tenuous at best.
-Alex.
Small Investor Chronicles
Posted by: Alex Khenkin | Feb 16, 2006 9:07:18 AM
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