Run, don’t walk, to see why Jeff Miller (A Dash of Insight) believes the stock market will garner a higher multiple next year.
Conventional wisdom on rates moving higher (which they have been) is that this presents a headwind for stocks in general. Jeff says that the conventional wisdom is not necessarily applicable right now. The gist of his research shows that the historical relationship between bond yields and stocks breaks down when interest rates are at an abnormally low level for a considerable period of time…
We are currently at the unusual tipping point in the relationship. The emerging consensus about improving economic prospects is having two effects: higher long-term bond yields and more confidence in earnings.
The implication is that stocks will get a higher multiple in 2011 as confidence improves. This is not merely speculation, but a conclusion based upon the data cited.
Anyone engaged in asset allocation must allow this argument enter their thinking before laying out next year’s game plan.