Rising Interest Rates Could Lock in Irrational Depression at the Worst Time for Doing So
I wrote last week about an article recently published by Robert Shiller in which he observes that: “In traditional financial theory, interest rates are a key component of valuation models. When interest rates fall, the discount rate used in these models decreases and the price of the equity asset should appreciate, assuming all other model inputs stay constant. So, interest-rate cuts by central banks may be used to justify higher equity prices and CAPE ratios.” The article concludes that: “Despite the risks and the high CAPE ratios, stock-market valuations may not be as absurd as some people t...