My Great Stock Market Question
Wednesday, June 28th, 2006
By Michael Lombardi, MBA for Profit Confidential
I need to share with you a question that’s been on mind for several weeks now:
Why would investors take the risk of buying big cap stocks like those in the Dow Jones Industrial Average that give a cash return of only 2.25% when they can buy U.S. Government guaranteed 90-day T-bills that pay 4.97%? My simple answer: Because investors are wrong to pick the Dow stocks over T-bills in today’ economic environment.
Similarly, why would investors risk their money in big blue chip stocks such as those in the S&P 500 that pay a dividend of only 1.89% when they can get a return 163% better by buying 90-day U.S. T-bills? Same answer from me.
But hold on, the typical investor would say. There’s the capital gains element. That’s it. Investors buy stocks so they can sell them to the next fellow at a higher price. Only one problem: Stocks are down six years in a row.
Dear beloved reader, the general stock market doesn’t rise when interest rates rise. Yes, there are many special situation stocks that do well no matter what the general stock market does. And, at our company, we have the pleasure of publishing many stock market letters that cover small, little-know small-cap and special situations. But, if you are looking at the big blue chip stocks and big-cap stocks… like many investors have in their mutual funds… I just don’t see those stocks presenting any kind of real opportunity.
There are analysts and economists out there that are now predicting the Fed will raise rates more aggressively than previously thought. We won’t know that for sure until tomorrow when the Fed raises rates for the 17th consecutive time and gives us some indication as to how much higher rates will go. I’ve been writing about the effects of rising rates and the general stock market for months–and my opinion remains unchanged.
If you have a chance to look at a 10-year chart of the Dow Jones Industrial Average or the S&P 500, you should. You’ll easily see a huge head-and-shoulders pattern for both indices. The bear market both those indices are presently in has a long way to go. Don’t be a casualty of it.
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Tags: bear market, dow jones, Dow Jones Industrial, interest rates
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
