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.