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> Also, the increasing interest rate is going to put downward pressure on the stock market, even if the economy does well. Right now that is what I consider to be the main cause of the drop.

Really? The 10-year Treasury yield (the best measure of long-term rates) has declined by 25% since the start of the year. No one is forecasting Fed interest rate hikes in 2016 anymore.

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Long term yields lower in response to tight money, not loose money. Economists who study market expectations found that the 10 year treasury actually rose with QE expectations, for example. This is rational: lower inflation and stagnant economy -> lower interest rates.

At one point in time (sorry, I forget when) there was a surprising (to some) announcement of QE during which you could observe the result directly. The Fed announced it would buy more long term bonds, and the price of those long term bonds fell.

It is also possible to disturb the equilibrium in one direction while moving it in the other direction. In the example above, the change in equilibrium (higher interest rates) outweighed the disturbance (lower interest rates).

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