Investing Knowledge

What a party we've had over the past 8 months. The FTSE 100 has risen over 50%. Shares of some companies, like Barclays (LSE: BARC.L - news) (LSE: BARC), Pendragon (LSE: PDG.L - news) (LSE: PDG) and Kazakhmys (LSE: KAZ.L - news) (LSE: KAZ) have soared many hundreds of percent higher.

Just about every asset class has been rising in value. Shares are up. Commodities are up. Gold has flown through $1,100 an ounce and some gold bugs are predicting a price of $2,000 or more for the useless and abundant precious metal.

Even house prices and sterling are on the up. It's been pretty hard to lose money.

And there may be more gains ahead. With interest rates low, and set to stay low for an expended period, house prices could keep rising. The stock market could extend its amazing turnaround.

No Brainer Stocks

You either leave your cash in a "high" interest savings account earning say 1.5% per annum, or you shove it in the stock market and earn a dividend yield far in excess of that paltry return, plus the possibility of capital appreciation to boot.

In an environment where just about everything is going up, it seems like a no-brainer. And lest you think world stock markets are heading for a crash, these soothing words from US Federal Reserve Chief Ben Bernanke should ease your mind

"It's not obvious to me in any case that there's any large misalignments currently in the US financial system."

If that's not enough, Fed Vice Chairman Donald Kohn separately said

"The prices of assets in U.S. financial markets do not appear to be clearly out of line with the outlook for the economy and business prospects as well as the level of risk-free interest rates."

Interest rates are the absolute key here. In the US, Bernanke has consistently said interest rates will remain low for an extended period. The market is currently expecting the extended period to mean around late summer next year.

Heaven Help Us

Heaven help us all if interest rates were to rise before then. On the one hand, it would mean the economy is recovering faster than expected. But on the other hand, the market hates shocks, so if interest rates were to unexpectedly rise, the market might expectedly fall fast.

But never fear Bernanke is on our side. Above, he effectively told us the US stock market is not over-valued. Note (Stockholm: NOTE.ST - news) he didn't say it was under-valued either, implying it could be trading at around fair value.

Big Ben will also let us know, well in advance, when interest rates are headed higher. He'll slightly change his words from "interest rates will remain low for an extended period" to "they'll remain low for a period of time" and finally to something like "they'll have to rise at some point in the not too distant future".

You get the drift.

C'mon Mervyn

Here in the UK, we're also set for an extended period of low interest rates. Unfortunately, our Bank of England governor Mervyn King, doesn't give us quite the same guidance as his US counterpart. In fact, in comparison, King could be said to be a perma-pessimist.

Britain is "facing a prolonged period of balance sheet adjustment" as households, businesses and government rein in spending to levels they can afford...

"We have . . . only just started along the road to recovery"

C'mon Mervyn, give us a break. Is our stock market over-valued, or not? When are you going to raise interest rates? Will we ever again be able to afford a holiday abroad? Should we buy shares in commodity companies like BP (LSE: BP) or in retailers like Marks & Spencer (LSE: MKS.L - news) (LSE: MKS (MKX.TO - news) ) or Next (LSE: NXT)?

The Good & The Bad

The truth is, no-one knows what the future holds from here. Right now, based on near 0% base interest rates both here in the UK and in the US, markets feel about fairly valued. That may change when interest rates rise, but for now, it's good enough.

Not every company mind, but in general. The good news is there's no obvious reason or catalyst for the market to crash. The bad news is there's no obvious reason or catalyst for it to go significantly higher from here.

Welcome to the road to nowhere.

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