|
To print article, click Print on your browser's File menu. Go back Posted 6/24/2004 |
|||||||||||
|
|||||||||||
Related Resources Decision Center: Get started as an investor Decision Center: Stock selection secrets Decision Center: Basic investment strategies |
|||||||||||
|
Forbes Bring on the rate hikes -- it's time to buy With no sense of history, too many investors think rising rates will harm stocks. But the record shows the opposite is true. By Laszlo Birinyi Jr., Forbes Peter Drucker, the celebrated thinker on management, once wrote that the great weakness of American business is that it knows no history. You would think that this criticism shouldn't extend to Wall Street houses, with their brain trusts of economists and research departments. You would be wrong. Today the investment community is convinced that once the Federal Reserve shifts from sly hints to bona fide interest rate hikes, stocks will get clobbered. Maybe even more than Iraq and oil prices, Fed fear is what has held back the market this year. And this in the face of good earnings news, which should be a tonic: 76% of S&P 500 stocks beat earnings estimates in the first quarter. History, though, teaches that these naysayers are probably going to be wrong. As noted by fellow columnist David Dreman and several others with a sense of the past, any negative impact on stocks from rate hikes is short-lived. Then the market tends to rise anew.
What we forgot in 1994 Everyone remembers how bonds got creamed in 1994, when the Fed pumped short-term rates from 3% to 6%. Long Treasurys lost 25% in value. What everyone doesn't remember is that stocks survived the rate hike. They treaded water in 1994 before moving up again. My firm has measured what happens to stocks when the 10-year Treasury is in a 20% rally or decline. There have been 11 such bear markets in the 10-year since 1962. In six of them, the market went higher during the bond market decline (that is, as rates increased). The average length of these bond market declines has been 8.5 quarters, and the S&P 500 has gained an average 5.5% taking in all 11 periods. When rates go up, price-earnings ratios usually do contract: They did so in seven of those 11 episodes. Bonds, of course, were massacred during those times of rising rates, losing an average 34% in value. Related news and commentary on MSN Money Many market optimists also suffer from a lack of historical sense. These bulls want to shun gold, with its reputation as a safe haven in tough times. That clich about gold is dead wrong. When stock markets turn up, gold is right there as well. In 1982's fourth quarter, gold went from $402 to $459 (up 14%) even as the Dow Jones Industrial Average rose 17%. And in 1999's last quarter, gold gained 8% while stocks did only slightly better, increasing 11%. No grasp of history Why do too few on Wall Street have a grasp of history? The reason may be that the investment world's best and brightest no longer go into market strategy or research, as they sure did a decade or two ago. After the recent scandals, research has an odor. Recently the big Wall Street firms have been making more money trading for themselves than trading or managing money for customers. Perhaps the real talent lately is found at the trading desk. Certainly historical precedent isn't infallible. My data show that, when rates go up, semiconductors enjoy an average increase of 49%. Maybe they will rally this time, too. But in 2004 to date the Philadelphia Semiconductor Index ($SOX.X) is down 18%. Chip leader Intel The big questions, as always, are when the Fed will tighten and by how much. Wall Street expects an opening move Wednesday at the Federal Open Market Committee's next meeting, with a quarter-point move that may be a prelude to more. One rule of thumb is that short-term rates should be two points over inflation. With the Consumer Price Index gaining 2% over the past year, that means the overnight rate must go from 1% now to 4%. Creatures of excess While the market reels during that exercise, treat the malaise as a selective buying opportunity. Note the caveat. Some stocks are down and likely will stay down because they were the creatures of excess. Stocks such as Netflix Instead, opt for first-rate stocks that the market has treated with unjustified harshness. Good examples are Fannie Mae And once the Fed does move, we are likely to see increased volatility, especially in bonds. Brokerage stocks should do well amid all this fee-generating trading, with names like Bear Stearns Copyright 2004 Forbes.com. All rights reserved. |
||||||||||||||||
|
||||||||||||||||
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.