Stocks will push for another bullish end to the year

With so much controversy and turmoil in the marketplace in 2007, it seems only fitting that a prediction of bullishness is viewed skeptically by many in the investment world. However, I believe there are several factors that will continue to churn out new records in most equity sectors and classes.

Recent stock market pull-backs have been caused mainly by rising interest rates. Bond Yields rose again on Thursday bringing rates to around 5.17%. Despite the substantial increase of 400 basis points, the equity markets finished higher due to some good economic data. Although bond yields pose a short-term threat to the markets, they can only do so much damage before the flood of capital and investor confidence takes over.

Looking at the 10-yr bond yield (considered one of the best measures of rates), it continues to approach the target Federal Funds rate level. But what is going to happen when bond prices become just a few hundred basis points away from the target interest rate? They will halt, quickly. In other words, the upside to the stock market far outweighs the potential rise in bond yields. Therefore, if bond rates are not going to get much higher, we must assume that housing will begin to stabilize during the latter half of the year. In addition, consumer and institutional confidence should continue to increase providing higher highs in the marketplace.

Another key aspect of the interest rate impact regards the flattening of the yield curve. One of the main arguments of the bearish analysts on Wall Street this year has been the inverted yield curve. Not only has the curve flattened, it has really begun to shape back to its normal progression, with yields correlating to the length of the investment. Stabilization of interest rates and normal payout percentages will make short term bonds more unattractive and simultaneously display equities as a prime target for even larger amounts of capital.

Stocks remain undervalued when taking into account global profits, revenue and earnings growth, higher margins, and currency conversions. Now might be the time to buy, not sell.