Wayne - Re.: Stock Prices and Interest Rates??
I'm interested in this discussion. I do not have data to back up my thoughts. Here we go: interest rate effect depends upon inflation, whether inflation is rising or stays steady. Interest rate affects the cost of capital available for expanding the enterprise (plant investments, production, etc.) and stimulating consumer demand for goods and services (mortgage, housing, equipment, travel, etc.) If the prices are not increasing (constant consumer price index and wages) companies need to squeeze earnings from internal productivity improvements, joint-ventures, marketing alliances, etc. (current situation). During the period of low inflation rate, the inflation-adjusted income (dividends+capital gain) stocks offer a better return on investment and therefore equities are worth higher p/e's. During the period of high inflation, there is no constraints on price, wages, etc. Brazil increased the interest rate to 40-50%, Mexico offers 40%. (Aside - Balance of payments affect local economy, currency valuation or devaluation, and global economy.) Ram |
