On the Horns of a Dilemma

At the beginning of this new year, investors must contend with rising interest rates and the gradual withdrawal of government support for the economy. At the same time, business margins are at all-time highs and profits are likely to be terrific, both of which are good for stock prices. So, on one hand a negative, and on the other a positive for returns. How will it work out?

Both rates and profits are important in setting asset values. It will be a matter of degree as to which will be more important. If rates do not climb precipitously, then higher profits can still drive higher prices. That seems to be the most likely outcome. The Federal Reserve is proceeding with caution, not wanting to derail the economic recovery they helped engineer.

However, investors are likely to be caught up between one side or the other of this argument all year long – the horns of the dilemma. That will make for bouts of volatility. Look for plenty of these. Growing profits are the most powerful reason asset values increase. If interest rates do not go crazy, we believe this side of the argument will prevail. So far, rates have not climbed much. It would take many increases to become much of a hindrance. The Bull and his partners are watching things unfold intently; stay steady my friends.

The Lonely Bull