Hugh Johnson
Hugh Johnson
Hugh Johnson OBEis a British author and expert on wine. He is considered the world's best-selling wine writer. His 1961 tasting of a bottle of 1540 Steinwein from the German vineyard Würzburger Stein is considered to potentially be one of the oldest wines to have ever been tasted...
ProfessionNon-Fiction Author
Date of Birth10 March 1939
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When it appears as though the governors of the Federal Reserve believe that the end of the rate increases is near, that's very good news for investors. A lack of ambiguity from the Federal Reserve is always a little bit of a shocker.
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On the surface level it's a real simple story. Interest rates are rising and the outlook for the economy and earnings is darkening every step of the way.
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Long-term interest rates are low and I'd prefer to buy when rates are higher and more attractive. As a federal government issuer or taxpayer, I'd be excited but, as an investor, I just don't see the appeal.
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Long term interest rates are higher now than they were in the second and third quarters, and debt levels are higher too. Yes, consumer spending will continue to expand, but it will be slower.
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You know, we had four great years because we had declining inflation and interest rates. There's been a sea change. We now have inflation and interest rates actually heading higher. That makes things entirely different - you can't get away with high-priced earnings or overvalued stocks and so we're going through this adjustment to a new reality.
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The biggest risk in 2006 is that the Fed will be seduced by worries about inflation into raising rates too high. A lot depends on what the 10-year does and while I would hope that they would take notice that it's going down in yield, the question is whether they will take it seriously or dismiss it.
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It will eventually slow the growth rate of earnings. Therefore you should own companies with low price-earnings ratios, not high price-earnings ratios.
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It will eventually slow the growth rate of earnings,
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It's a migration toward value as a reflection that investors believe the growth rates of earnings are slowing. It will continue until investors are convinced that the Fed will take its foot off the break, or reduce interest rates.
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The recent rise in interest rates has created some uncertainty about the bull market's longevity.
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It's a reasonably accepted conclusion that the Fed will raise rates in both June and August; that's what the market has discounted. I don't know if Friday's employment report will change that, no matter what it says.
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This market is trying to rally. If the Fed reduces interest rates by 50 basis points, it will touch off a rally, but if we get a rally it will be guarded.
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Is the possibility of a tax cut and a rate cut enough to eliminate or neutralized the concerns about the economy and earnings, letting the January effect play out, ... Watch the overall market and if the shift from defensive stocks to economically-sensitive stocks continues, it may be enough to turn the tide.
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The worry is that the lid, or the cap, on interest rates is now off.