This is what will stop the record stock market

The U.S. stock market achieved its longest rise in its history on Aug. 22, with the Standard and Poor’s 500 index SPX, +0.03% up by 230% since 2009. Although this wasn’t the biggest increase in a bull market, it marked the longest period of increasing share prices. The primary driver has been the extremely low interest rates maintained by the Federal Reserve. The Fed cut its short-term federal funds rate to near-zero in 2008 and did not begin to increase it above 1% until 2017. Even now, the federal funds rate is lower than the annual inflation rate.

The Fed also promised to keep the short rate low for a long period of time, causing long-term rates to remain low as well. With interest rates so low for so long, investors seeking higher returns bought shares, driving up their prices. Stock-market booms don’t die of old age; they are generally killed by higher interest rates. That often happens when the Fed raises the short-term interest rate to stop or reverse rising inflation. Although the Fed’s preferred rate of inflation — the price of consumer expenditures — has just reached its target of 2%, other measures of price growth are rising more rapidly. The overall consumer price index (CPI) is now 2.9% higher than it was a year ago. Even “core” consumer inflation, which strips out more volatile food and energy prices, has increased by 2.4% over the past year.

The rise in long-term rates will reduce the present value of future corporate profits and provide investors with an alternative to equities. The result will be a decline in share prices. I don’t know when that will happen, but I am confident that it will.