Aging Bull
Can the market kick up its heels one more time?
"This is the only time in postwar history where a recovery has taken place ... without any rise in long-term borrowing costs," Paulsen says. This economic expansion began in November 2001, with 10-year treasury notes yielding about 4.7 percent. More than five years later-and after 17 Fed hikes in short-term interest rates-10-year treasury yields are almost unchanged.
So long as long-term borrowing costs remain cheap, Paulsen thinks there's a good chance that money will find its way to higher-risk, higher-return assets like small-cap stocks.
Don't forget the Fed. So far, the bond market has all but ignored the Fed, but stock traders would be foolish to follow. Fed rate decisions tend to quickly change the stock market's mood. Since World War II, Stovall says, the S&P 500 has declined an average of 2.2 percent in the six months leading up to the first in a series of Fed rate cuts. Yet in the six months after the first rate cut, stocks soared 11 percent on average. And 12 months after the Fed began to ease monetary policy, the S&P 500 has jumped 18.5 percent on average.
Check housing prices. Unlike last year, many investors are betting that the worst is over-or close to over-in the housing market. The National Association of Realtors predicts median sales prices of existing homes will keep sliding in the first quarter of 2007, then rebound.
But what if prices continue to fall? That could spell bigger troubles for consumers-and that's a recipe for unexpected problems in the U.S. economy.
Might want to keep that Prozac handy.
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