Money and Metals

The LA Times looks at risks and reward. " A handy excuse for anyone who's afraid of committing to stocks or bonds this year is that the Federal Reserve says it's a bad idea."

"How so? The central bank, by raising short-term interest rates to 4.25 percent from 1 percent over 18 months, is sending a message that investors ought to be taking on less risk. Some nervous investors are echoing what they believe the Fed is implying: that it's difficult to justify paying current prices for stocks, bonds, real estate and many other assets because the returns they might generate in the next few years aren't compelling compared with what cash accounts pay."

"The so-called risk premium; the reward for holding a risky investment over risk-free cash--isn't there, many say. 'Our five-year forecasts show that most asset [classes] are expected to earn very little over cash,' said Gordon Fowler, chief investment officer at Glenmede Trust Co.."

"Of course, that's a judgment call that is dependent in part on estimates of such variables as future corporate earnings growth and inflation. Yet Greenspan himself has marveled this year at how little risk investors seem to think they're taking in stocks and bonds at these prices and yields. Because volatility in stock and bond markets has declined sharply over the last two years, people may be figuring that that relative calm will endure forever, Greenspan said in July congressional testimony."

"His response to that notion was a warning: 'History cautions that long periods of relative stability often engender unrealistic expectations of its permanence.'"

"The minutes of the Fed's Dec. 13 meeting, showed that policymakers believed that the number of additional rate increases 'probably would not be large.' Once they're finished, stocks should boom again, right? Well, maybe."

"Michael Panzner took a look at the performance of the S&P 500 index in the 12 months following each Fed rate peak since 1980. The S&P was higher a year after the peaks of 1984, 1989 and 1995 (it was up 12.7 percent, 12.9 percent and 35.7 percent, respectively). But it was lower a year after the peaks of 1981, 1987 and 2000 (down 9.3 percent, 16.1 percent and 12.4 percent)."

"Not surprisingly, the market's trend mainly hinged on what happened with the economy. So if you believe that the economy runs a high likelihood of recession this year, history supports the idea that the risk in buying stocks is excessive. If, however, you see a soft landing, the risk of being out of the U.S. stock market would seem to be greater than the risk of being in, even with cash returns better than they've been in nearly five years."