Some think interest rate boost may actually be good for stocks


SHOULD WARNINGS of an interest rate boost frighten long-term investors into unloading their stocks? No.

Despite the booming economy -- unemployment at the lowest in 28 years, auto sales robust and leading indicators pointing up -- serious inflation signs are nonexistent. This has prompted many to conclude that the Federal Reserve will not increase rates when its Open Market Committee meets Tuesday.

As one local broker quipped, "Why would the Fed take away the punch bowl just when the party's going strong?"

A rate increase wouldn't necessarily end the bull market, of course.

As Goldman Sachs' strategist Abby Joseph Cohen says in Fortune magazine, "The question isn't whether the Fed will raise rates -- the question is when and by how much."

But Cohen, who has consistently been bullish, feels that an increase could be a positive factor, holding off inflation while still allowing earnings and stocks to advance.

History shows that a rate increase doesn't always damage stock values. The Dow Jones average fell about 10 percent in March 1997 when the Fed tightened credit, but recovered within a few weeks and ended the year up 22.6 percent.

Encouraging note: If stocks fall because of rising rates, investors could load up on favorite issues at lower prices -- Merck & Co. Inc., Pfizer Inc., Gillette Co., General Electric Co., Procter & Gamble Co. and other blue chips considered temporarily overpriced.

Pub Date: 5/13/98

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