Gurus not sweating Discount Rate hike

Does the Fed's recent Discount Rate increase mean other rate hikes are soon to come? Several of the market gurus I follow don't think so.

By John Reese Feb 26, 2010 5:22PM

Over the past week, the investment gurus I keep an eye on have expressed some varying opinions on the attractiveness of the stock market. But one thing many seem to agree on is that the Federal Reserve's recent Discount Rate increase isn't the first salvo in soon-to-follow broader rate hike that will stall stocks.

 

One of those gurus was James O'Shaughnessy, whose writings form the basis of two of my Guru Strategy computer models. "I think that basically it's not a big deal," O'Shaughnessy told CNBC when asked about the Fed's move, adding that investors shouldn't have been surprised by the Discount Rate increase. "I really think that what this shows us is the Fed thinks the economy is strong enough for this move right now," he said.

O'Shaughnessy is very bullish on stocks over the longer term. He said he thinks factors are in place that will make stocks the “asset class of choice” over the next three to five years.

 

Barry Ritholtz of Fusion IQ and The Big Picture blog also doesn't seem too worried that the Fed's move means more rate hikes will soon follow. While past Discount Rate increases have been precursors to Federal Funds rate hikes (and bad news for stocks), Ritholtz says not to count on history repeating itself. "You get the sense that this Discount Rate move and this whole quantitative easing is not the typical Fed cycle," he told Yahoo TechTicker. Ritholtz, who saw both the credit crisis and ensuing rally coming, remains bullish on stocks, saying that he sees no indication that the rally is in its final stages. “As long as the fed is going to make money free … it’s hard to find a short, other than some company restating earnings,” he said. “Nothing [in the market internals] is saying, ‘Hey it’s all over but the crying.’”

 

Ritholtz says the “easy” trade now would be to move to cash amid fears that the rally is petering out -- but he adds that over the years, he’s found that the easy trades aren’t usually the ones that make him money.

 

Another guru not fretting about the Fed's move was Jeremy Siegel, the Stocks for the Long Run author and Wharton professor. Siegel told Bloomberg that he thinks the Fed will raise the Discount Rate “two more notches up” before it begins to increase the Federal Funds rate. "Before they [raise] the target rate Fed Funds they must revive the Fed Funds market," Siegel says, saying that it has been "moribund" over the past year because of the low Discount Rate.

 

While some top strategists like O'Shaughnessy are seeing good things ahead over the long term for stocks, others aren't. One is Rob Arnott of Research Affiliates and PIMCO. In a piece written with John West for IndexUniverse.com, Arnott says that over the next decade the standard market-cap-weighted 60/40 stocks/bonds allocation “is likely to disappoint. Again. Net of inflation, it could even be worse than the past 10 years.”

 

Arnott and West write that stocks aren't looking so attractive today -- and neither are the alternative investment classes that produced strong returns during what was a weak 2000s for equities. "Today, yields on most of these diversifying assets are well off the rich premium levels at the turn of the century,” they say, referring to assets like Treasury Inflation-Protected Securities (TIPS), emerging market bonds, and Real Estate Investment Trusts (REITs). Arnott and West say that “diligent tactical asset allocation” will be key to making money in the coming decade, and that non-market-weighted indexes should outperform their cap-weighted peers.

 

Another guru offering advice was Jim Oberweis. In his latest column for Forbes.com, Oberweis says that questions still linger about the economy, and where macroeconomic growth will come from once the current easy year-over-year comparisons end. He says picking "consumer-focused stocks with the potential to buck future headwinds will be key.” He's finding some niche-oriented firms that fit the bill in the technology and consumer discretionary sectors -- areas he says are “the pillars of a growth portfolio".

 

John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".

 

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

113
113 rated 1
268
268 rated 2
422
422 rated 3
632
632 rated 4
512
512 rated 5
518
518 rated 6
682
682 rated 7
523
523 rated 8
343
343 rated 9
124
124 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
KOGKODIAK OIL & GAS Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.