2006 Predictions

[Beestie]

Originally Posted by tw

I didn't see any reference to interest rates. Almost no interest rate increases are what other market monitors cite as a reason for market improvement.

There is no single economic corellation with stock market movement. But there is one non-economic one: optimism or, if you prefer, exhuberance. Rationality notwithstanding.

Interest rates affect stock prices but do not determine them. One reason the effect of rates on stock prices is not certain is that in an increasing rate environment, corporations turn to equity markets for capital and away from debt. This leads to a decline in new debt offerings. If the supply of new debt falls, investors must choose between existing debt which is declining in value because of the increase in rates or equity. If, during this time, investors are generally confident (optimistic) then the money will flow in, the demand for debt will decrease and interest rates will experience a downward pressure which even if it is not sufficient to decrease rates may be enough to slow their increase.

Bottom line: If everyone thinks the stock market will improve then it will.