Why We Are Bullish on Stocks
Mon, 08/27/2007 - 16:56 — moneysageThe sharp decline in market rates is providing a powerful underpinning for the very strong bull move in stocks which is now underway। The yield on the 10-year Treasury note has fallen from 5.3% in mid-June, to 4.6% today. This is a decline of 70 basis points (just shy of a 3/4 point drop). With the benchmark Treasury yielding 13% LESS than it did 10 weeks ago, stocks are now more attractive BY ORDERS OF MAGNITUDE than they were in June. Moreover, we believe market rates will continue to head lower, as the economy weakens and inflation continues to fade.
Stocks compete with bonds for investor cash; at these interest rate and stock valuation levels, stocks are a no-brainer, we think।
The down-cycle in interest rates is the sweet spot for stocks. Only in those extremely rare instances when the down cycle coincides with a collapse in earnings (early 1930s, 2000-2002) is the normal, highly favorable relationship between the declining rate cycle and rising stock prices derailed. With corporate balance sheets unusually strong, the global economy remaining robust, and a "lean-and-mean" mentality prevalent in the executive suite, we believe corporate earnings outside of the real estate/financial complex will remain reasonably good.
Moreover, we think the FED will be pulled, kicking and screaming, by credit market and political pressure to join the parade of lower interest rates.
