<FOOLISH FOUR PORTFOLIO>
By
ALEXANDRIA, VA (August 26, 1999) -- I should go on vacation more often. (Hear that, boss?) When I left, the Dow was bouncing around the mid-10,000s and going nowhere. I return to find it up a solid 500 points and definitely out of its doldrums. Our Foolish Four portfolio is up 5% in two weeks, too, and I am happy to take credit for that. After all, this is the "gone fishing" portfolio.
Alan Greenspan? Oh. Well, maybe he had something to do with it, too.
Anyone who ever needed proof of the truism "The market hates uncertainty" saw an excellent example of that this week. Remember how rising interest rates are supposed to be bad for the market? (The increased cost of borrowing comes right out of the corporate bottom line. Higher interest rates equal lower earnings, lower corporate earnings equal lower, or slower growing, stock prices -- all other things being equal.)
The fear of an increase in interest rates by the Fed was cited all month as the explanation for the market's drop from July's high. The Fed actually raised interest rates on Tuesday and what happens? An all-time high for the Dow. That's a perfect illustration of how the market prefers the certainty of an increase to the possibility of an increase. Better the devil you know, I guess.
This seeming irrationality isn't as illogical as I am making it sound. While an interest rate increase is traditionally bad for business, and thus the market, the collective minds that make up "The Market" are quite rational. They know that the interest rate will cool off a robust economy and prevent inflation. All things being equal, they prefer the increase in interest rates to the possibility of inflation, although many economists are starting to say that inflation should no longer be the bogeyman it once was.
And cooling off an economy that is blasting along at a 4% clip (a 4% annualized growth rate, that is) is kind of like backing off from 70 mph to 55 mph: You'll still get where you are going in a reasonable time, but you might avoid a speed trap along the way.
The end of the uncertainty, even if the end is the result one fears, is a relief. Optimism returns to the markets and they blast ahead. Actually, in this case the blasting occurred before the rate increase. Apparently the markets considered the Fed's action a foregone conclusion -- an example of that other truism: Expectations are more important than reality.
Whatever.
All of the above is interesting, but hardly vital information to the Foolish Four investor. We know that from day to day and week to week the markets will go up and the markets will go down. What counts is the long-term direction of the market and the tenacity to stick with a sound investing program that can outperform the market over the long term.
Fool on and prosper!