If I've been looking at graphs correctly, there is a strong positive correlation between stock prices (or P/B values) and interest rates over time, i.e. P/B values tend to be high when interest rates are high.
Why is this? Does this not contradict the following two cornerstones:
1) Asset prices are formed by discounting future cash flows. When interest rates are high, the discount factor is high, and thus the price should be lower.
2) When interest rates are low, people tend to invest more in stocks, driving their price up.
I guess there's something wrong with my thinking here? If you can, please refer to relevant studies in this area.