The great debate

Market weighs the importance of interest rates over earnings

Quick question: what’s more important to investors, interest rates or earnings? It all depends on the trading session.

The best evidence of this was revealed during the market’s most tumultuous month, October. And, boy, were investors spooked. So much so that on Friday, October 15, the Dow Jones industrial average dropped below 10,000 in intraday trading-the first time it’s done so since April. The Dow, however, managed to close that day at 10,019.

Close examination shows just how event-oriented investors have become, with each dip and rise in the market hinging on wholesale and consumer price reports, corporate earnings and, of course, sermons on responsible investing practices from the oracle, Federal Reserve Chairman Alan Greenspan.

To underscore this point, let’s take a look at the weeks of October 11 and October 18-volatile times in the life of the Dow. By the end of the week of October 11, the blue-chip average had dropped 5.9%, or 630.05 points, the worst-ever weekly percentage drop since October 1989. The macroeconomic reasons: once again, fear that higher inflation would force the Fed to hike rates-the third time it would do so in 1999-as well as comments by Greenspan on the high prices of stocks. At the microlevel, investors punished companies that either reported lower-than-expected earnings, such as bellwether technology stock Intel (Nasdaq: INTC), or warned of future profit shortfalls, such as munitions manufacturer Raytheon (NYSE: RTNA), which subsequently suffered a 43% share-price drop.

The following week, the blue chips seesawed based on a combination of consumer price reports, earnings news and legislation that would enable banks, insurers and investment banks to expand into one another’s businesses. Some companies, such as Microsoft (Nasdaq: MSFT), reported stellar profits, pushing the Dow up. But others, chiefly IBM Corp. (NYSE: IBM), which warned that fourth-quarter profits would be down because of a slowdown in spending sparked by Y2K fears, sent the Dow plunging. By the end of the week, the industrials had climbed 450.40 points, their best weekly gain since July.

Whew! So, how do you keep from losing your head-and hard-earned dollars-in the tumultuous months ahead? “Don’t let the market work against you,” says Richard V. Tolbert, senior vice president of investments at PaineWebber Inc. “Let time work for you. Keep a time horizon of five years and know that even though the market has historically produced huge dips, that it has always sloped upward.”

Other experts, like investment counselor Jesse B. Brown, president of Krystal Investment Management in Chicago, say investors should view such dramatic drops the way that shoppers use “Neiman Marcus final-call sales-to buy quality companies.” And Larry Jones, executive vice president of The Kenwood Group, a black-owned money management firm in Chicago, maintains that investors should stay “sharply focused on portfolio construction and diversification” and not rely on any one equity for their returns.

Don’t get caught up in the market hysteria. Continue to focus on the long term.

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