"Charles Dow Looks At The Long Wave"
Essential reading [pdf] - which I've mentioned before. Key point:
"[T]he peak in interest rates always precedes the long wave peak in stock prices by many years. When interest rates and the stock market are both rising together, the industrial growth component is dominant. The period after interest rates peak is when stock prices rise as an alternative investment. During that period declining interest rates force yield-conscious investors into alternative investments of lesser quality in order to maintain yield. Since stocks are the most risky and least quality investments, they become the final alternative, especially when their price continues to appreciate as a result of increasing cash flow into the stock market."We've gone through all the stages of Dow's theory.
1 comment:
Makes sense to me. But if the peak in rates precedes the peak in stocks by a few years, what date(roughly) should we think about for the peak in rates? I wonder if this framework would have given a lot of false signals for a bear market since rates have been coming down for a few decades now. Maybe we should only count the last few years because that's when yield-seeking behavior really took off?
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