Not coincidentally, the jump in real interest rates occurred within days of the final passage of across-the-board tax-rate reduction on individual incomes, corporate profits paid out as dividends and capital gains. The dividend piece has been a quick winner: Citigroup, as one example, recently raised its dividend by 75 percent, providing $7 billion of new cash to investors. That's just one company. Hundreds of other companies are following suit, many with 50 percent dividend increases.
Lower tax rates on invested capital always raise asset values. So do dividend increases. This fiscal recipe for wealth creation and strong economic growth is the real driver behind the recent bond-market interest-rate rise.
It is quite true that higher interest rates do in fact reduce the present value of future corporate earnings. But if lower tax rates and higher productivity returns have raised real interest rates on one side of the stock market ledger, these very same factors will raise corporate profits and economic growth on the other side. In short, the bond-market yield rally will not detract from stock market valuations.
Stocks, by the way, are still roughly 30 percent undervalued in relation to higher Treasury bond rates. And the value of stocks benefit enormously from profitable growth, while Treasury bonds do not. This is all the more reason to stay invested in the stock market.
Too many in the media and in Washington substantially underestimate the growth value of supply-side tax cuts. And most do not understand the growth effect of rising productivity. But tax cuts and productivity are precisely what will boost jobs, wages, wealth and the economy's potential to grow over the long run.
Borrowing a phrase from the great economist Milton Friedman, the long run begins right now.