Many in the market feel that the economy has grown artificially due to cheap money, taper, borrowed by businesses to buy back stock and increase dividends. When the cheap money is gone and interest rates rise do you see the slowly improving economy grinding to a halt or do you see these cheap money investments paying off and allowing the economy to continue to grow?
With respect to the economy, even with the end of quantitative easing, I believe interest rates will remain relatively low as the Fed rate will be increased very cautiously. The Fed’s job is to try to keep the economy growing, so I don’t believe they will do anything drastic and risk contraction.
The stock market will be very sensitive to those interest rate hikes as they come, probably reacting very negatively each time rate hikes are announced. Higher interest rates will attract some investors to bonds, potentially steering money away from equities (although more likely some of the record amounts of cash currently sitting on the sidelines will go towards bonds). Higher interest rates also make it more expensive for investors (and investment banks) to buy stocks with borrowed money, potentially cutting demand (although likely not to an extent which will have a meaningful impact on stock prices).