thestar.com
from the toronto star
November 21, 1999
Place your bets on stocks, not bonds, as bull charges on
Okay, I'm going way out on a limb here.
I think we're in the second up-leg of a bull market, and that the rise will be the strongest of this bull's advance. I think this up-leg will last until January, run into a little trouble in February through the spring and then start gaining again in the third and final run.
Most bull markets contain three up-legs, interrupted by corrections, although the periods of gain can stretch to five, each persisting 14 to 18 weeks.
Currently we've completed our fifth week of an intermediate advance trend that began during the week ended Oct. 22, and has the potential to continue through to the end of January, 2000.
Soon afterward, in February, the U.S. Federal Reserve will be meeting on interest rates.
The current advance is significant in that most major world stock markets are also rising, even though interest rates are rising in most areas.
Actually, interest rates have been rising all year in response to strong global growth and the rising prices for oil and other commodities prices that accompany this.
Our two charts this week are remarkable in that their patterns are very similar.
The upper graph is that of the weekly closes, and Thursday's close for last week, of the Dow Jones commodity index, which contains a basket of commodities and is a good barometer of potential inflation.
It appears that the down-trend that began in early 1997 is over. Last January the index broke up above its down-sloping trend line.
The lower graph shows the yields of the U.S. 30-year long bond. We can see that falling commodity prices and falling long-bond yields seem to go hand in hand.
Note that the long-bond yield also fell from more than 7 per cent in early 1997 to less than 5 per cent during the October, 1998, crash. Since then the long-bond yield has run up in a fairly persistent advance to a recent 6.5 per cent.
A few months after bond yields climbed, the Dow commodity index began a first intermediate up-leg. The bond market had correctly predicted the early 1999 increase in oil and metal prices.
The U.S. Federal Reserve followed the lead of the bond market and began a series of three hikes in interest rates, claiming action was needed to ward off inflation. Stock markets pretty much traded sideways most of the year, despite the first two rate hikes. And now markets are gaining strongly, despite the third rate hike this year.
In fact global stock markets may now be ignoring any Fed action on interest rates and concern over inflation, focusing instead on the current robust global growth and accompanying gains in corporate profits. Investors are buying into the idea that a little inflation and slightly higher interest rates can be accommodated at this time in the business cycle.
It's not the first time this has happened and it won't be the last. Stock and bond markets usually separate near the end of a cycle, with bonds topping out several months ahead of stocks. The last time this occurred on a grand scale was from October, 1996, through to October, 1997.
Currently the bond market has potentially higher risk than the stock market because the U.S. long-bond yields could run up to around 7.5 per cent without upsetting the stock markets. I would avoid bond mutual funds for at least one more quarter.
In the meantime get out your darts for stocks. Anything you hit should go up, although don't mistake a bull market for brains.
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