Explaining the Relationship Between Stock Prices and Interest Rates

For many investors, the fact that stock prices and interest rates are inversely correlated is a mystery. We've seen this over the last 13 months, as the S&P 500 (^GSPC -0.30%) soared in response to the Federal Reserve's third round of quantitative easing.

But once you consider the impact that lower interest rates have on both business expenses and consumer spending, it all becomes clear.

Retail companies are at the forefront of this. As I discuss in the video below, when interest rates go down, companies like Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Costco (NASDAQ: COST) benefit from a corresponding rise in disposable income. All else being equal, when their customers get richer, so do they.