Manfried, I certainly would hope that earnings rise more rapidly
than interewt rates. Here's the deal. The overall stock market
"usually" returns between 7% to 10% over a long period (5 years,
10 years, etc) When bonds start paying significant (greater than
8% yields) as happened in the US when the Fed tightened to wring
out inflation, assets are put into safe high yield instruments.
That was the story of the 80's. You get a double whammy. High
interest makes it more difficult for industry to earn a good
return and even if you do, why take a risk in the stock market
when I can get a safe yield from the government. When interests
rates are low, people turn to equities. Earnings tend to grwo,
amd where can you get a really good return anyway. So yes, over-
all you are right to worry about rising interest rates. The old
rule of thumb was that after the Fed raised interest rates three
times, the market would fall. So where does that leave us now.
With the long bond at 6.7% will people abandon equities for that
safe, predicatable return. It's only my opinion, but I don't
think so. Maybe for 10%. Certainly for 12%. But not for 6.7%
So UNLESS interest rates keep rising to substantially higher
levels, I don't think there will be a mass desertion to bonds.
However, there is another phenomenon which is interesting.
From what I read, money is pouring into Mutual Funds at unprecented
rates. That money is going to chase stock certificates and that
probably means that the market is headed higher over a six month
window. While people worry about all the Mutual Fund investors
heading for the exit at the same moment, it is hard to picture
the scenario for that right now. We have low inflation, modest
growth, good exports (except for Japan, but that's improving)
and leading edge products (like microprocessors, medical instruments,
drugs, software, networks, mobile communications). We have a high
but by no means insane market valuation. So I personally am hanging
on for the ride. Big picture tells me that there are lots of
stock buyers, no big problems for business right now, and interest
rates aren't looking irresistably attractive. If one of these factors
change, THEN I must reevaluate.
Good luck.
BJ |
