We are in what amounts to a bear market rally.
Many analysts and investors don't see it that way and
complacency is back. US corporate earnings in the third
quarter of 2002 were up 9%, ahead of analysts'
downward-revised 6% expectations. The Republicans have taken
full political control and will cement existing tax cuts and
make new ones. And now the Federal Reserve has surprised the
market with a big interest rate cut.
In a year's time, though, I expect equities to be lower than now
and government bond prices to be higher. Some time in the next 12
months, the S&P500 will slip below 700 and the US 10-year
treasury yield will head towards 2.5%. The dollar will weaken a
little (until the European Central Bank cuts rates too) and then
mark time. The big dip is for when Iraq turns out to be a messy
campaign....
