Word: interest
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Dates: during 1990-1999
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Sampras torched Agassi and the rest of the field on Wimbledon's grass. And he has since beaten Agassi twice on hard courts, but the matches were close enough to have rekindled new interest in the Great 1990s Tennis Rivalry (That Didn't Happen). "It's good for tennis in America to have us two going at it like we've been the past couple of months," said Sampras after their third dance. "I feel a certain buzz with the rivalry kind of kicking...
...this new era, "three steps and a stumble" has lost its magic too. Yet the theory deserves comment as an alert to the dangers of rising interest rates. Last week the Federal Reserve bumped its target for the benchmark federal-funds rate to 5.25% from 5%. It was the second such hike this summer, and many believe that the Fed will move again in October. That would fully reclaim the cuts put in place during last year's global crisis and give the Fed more room to cut rates all over again if anything goes wrong at year...
...three quick Fed rate increases were viewed as evidence of a booming economy and unavoidable inflation--the steps that lead to a stock market stumble. Now, though, Fed hikes don't have that kind of impact because inflation has proved inert for a decade. Even if the Fed raises interest rates a third time this fall, it won't necessarily jolt the market...
What it could do is shift the kinds of stocks and other investments that make the most sense. When interest rates are rising, the last thing you want to own is banks and brokerages, whose cost of money goes up and whose lending and other businesses tend to slow. You also want to avoid highly speculative (read Internet) companies with little or no earnings. Even steady growth stocks like food and beverages tend to lag as their earnings cheapen in an inflationary climate. Fixed-income investors should avoid longer-term securities because prices fall as rates rise...
...with everything on Wall Street, the trick to profiting from any trend is being right about it in the first place. Despite interest rates that are markedly higher today than a year ago, it's not at all clear that rates will keep climbing. In fact, long-term interest rates--set by bond traders, not the Fed--have tumbled in recent weeks on faith that this summer's boosts in short-term rates are enough to stop inflation cold. If that's the case, the logic of the previous two paragraphs applies--in reverse. No one said this is easy...