The NASDAQ, the DOW, and the Economy
The current divergence of the Naz and the DOW may increase increase in the future in ways that were not possible in the past without causing a market crash. I believe the Naz will go much higher due to two factors:
1. The Naz represents the internet and high bandwidth elements of the higher growth rate "new economy" equities more strongly than does the NYSE or DOW. Fundamentally, the higher growth rate in the "new economy" is due to the high demand for productivity improvement and cost reduction available from new technologies.
2. The Fed's attempts to stave off inflation will pull down the "old economy" that is more sensitive to interest rates than the "new economy" that is funded primarily by the equity market. As more and more investors realize this, more investment dollars will be pulled out of the "old economy" equities and put into the "new economy" equities. This effect has been accelerating lately. Today's reaction to Greenspan's comments about further rate increases is typical.
The "old economy" is between a rock and a hard spot. If they want to survive, they have to adopt more efficient technology and processes. The most cost-effective way to do that is buy them from the new economy. The cost of debt is going up because of rising interest rates, but the cost on not investing is much higher--those who do invest will gobble up the market share of those who don't.
I think the bottom line is that rising interest rates will further stimulate growth in productivity that will offset the cost of higher interest rates, reduce the need to hire new employees, and offset what wage increases are necessary to retain employees. If productivity is high enough, prices can even drop while interest rates go up. How long can the Naz go up and inflation remain low while interest rates rise? I suspect that a lot of enterprises are just now figuring out how to take advantage of available productivity improvement processes and technology. So the current situation (low inflation, high Naz growth, and short term interest rate increases) might continue, if inflation remains under control.
The Fed might be able to keep inflation under control if the President and Congress don't do something stupid. With the Fed set on moderation, I suspect the greatest threat to the current economic growth situation is a tax cut that would over-stimulate an already hot economy. |
