On the other hand, the economic recovery could proceed apace despite sharp rises in interest rates. From this more optimistic scenario, two distinct possibilities arise. The first possibility is that the inflation of an asset bubble proceeds as many investors deploy excess liquidity in the economy to bid up the prices of various risk assets such as stocks and real estate. The second possibility is that the rise in interest rates will trigger a concomitant decline in the prices of income producing equities (i.e., dividend stocks) that are widely being deployed in portfolios as fixed-income substitutes and which are currently trading at valuations that are unprecedented. Such a scenario implies either a decline in overall stock prices, or a massive and messy sector/style rotation (from dividend producing value stocks to non-dividend producing growth stocks) that leaves the prices of the major indices such as the S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) relatively unchanged.
If you think you know your way around this prospective financial markets mine field, good luck to you. Simply beware of one thing: As far as prospective returns on equity investments are concerned, the "easy money" is no more. At the time of publication the author had no position in any of the stocks mentioned.Follow @jameskostohryz This article was written by an independent contributor, separate from TheStreet's regular news coverage.