A reader of our Dow 130k article has raised an important question about the risks that the stock market faces when confronted with the prospect of rising interest rates. The reader says, in part:
“…they say that interest rates are mean reverting and based on where we are today (historically low) I would think that the betting man would bet that it can only go up from here. If that is the case, I can't see a bull market in the coming years.
“What if the scenario is that we have permanent low inflation (Secular stagnation). Productivity improvements through outsourcing and technology innovation may explain this paradigm shift.”
We don’t have much to go by other than the historical record. In this case, the historical record says the following:
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Interest rates will go up
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Inflation is broadly bullish for the stock market
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the period of “low inflation” is behind us
In this article, we will examine, from a historical perspective, whether this is a new era where all of our claims are false or history will repeat.