How the stock market works! Interest rates, dividends, earnings, forecasts! The thing with the stock market is that it gives you signals way ahead but nobody wants to listen. The things I have been blabbering about over the past two years are the following: Higher interest rates will come as the FED told us! Higher interest rates will squeeze valuations Higher interest rates will slow down economic growth Higher interest rates will slow down earnings growth So, let’s start by discussing the above. The 10-year Treasury passes 3% Up till when the 10-year Treasury was below 3% nobody seemed to care except a few crazy analysts like this scribe. However, when it crossed 3%, the market suddenly looked at what has been going on for already two years almost. Now, sooner or later higher interest rates must affect valuations because if you invest in the 10-year Treasury you have a guaranteed 3% yearly coupon now and a guaranteed principal payment in 10 years. This means that dividend paying stocks must trade at a premium on that. And what is important to grasp is that when the required dividend yield goes form 3% to 5%, the stock price falls 40%. So, if you have been wondering what has been going on with dividend cash cows like Altria (NYSE: MO) apart from the normal regulatory noise and declining sector trends, well its higher required yields.