I’ve posted Entry #484 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Effect of Interest Rates on Stock Valuations is Exaggerated.
Juicy Excerpt: Shiller wrote that: “People will point this year to low interest rates to justify the high C.A.P.E. ratio. But interest rate levels historically have not correlated well at all with the C.A.P.E. For example, low long-term rates did not explain the high C.A.P.E. ratios in 1929 and 1999, nor did rising long-term interest rates explain subsequent market crashes.”
That to me is how you go about testing a theory that you have re how the stock market works — you check the historical record. It makes sense to believe that low interest rates cause high stock prices. It’s a plausible theory. But, when we are putting our retirement money at risk, we need more than a plausible theory to guide us. Given the poor historical correlation between low interest rates and high stock valuations, I am not willing to buy into this theory.
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