Stock Market-Interest Rate Rhymes

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Dear fellow investors,

Warren Buffett regularly reminds his shareholders that interest rates are a gravitational pull to stock prices. History shows that the movement of stock prices and interest rates don’t necessarily happen simultaneously but play out over time. Where are we now in this continuum between long-term interest rates and stock prices?

Thankfully, John Authers shared his thoughts at Bloomberg and provided the following chart:

price earning ratio

The CAPE ratio is the cyclically adjusted price-earnings ratio. By averaging earnings over a ten-year period, Professor Robert Schiller attempted to give investors a view of stock prices that took out any short-term earnings movements. Its purpose was realism, and with the stock market riding a multi-decade run of growth stock success, realism hasn’t done investors a whole lot of good.

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