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Market Downdraft Could Force Healthy Asset Reallocation

David Dietze, president of Pointview Financial Services, told CNBC’s “Morning Call” that rising interest rates will force a healthy reallocation of assets and be good for the market in the long-term.

“We’re cautious now,” Dietze said. “If you’re a bond investor, you can now get an interest payment that’s about 10% greater than it was three months ago. Meanwhile, look at the stock market. I’ve got to pay 15% more for the same merchandise I could have gotten three months ago. It’s in the cards here for a reallocation, which I think is going to be healthy for the market.”

Phil Dow, director of equity strategy at RBC Dain Rauscher, said it was unrealistic not to expect a short-term correction, but he remained optimistic.

“If you look at the valuations now, assuming we have a reasonably good year on earnings, there’s still a big advantage in stocks on an earnings yield basis versus bonds –- about 25% on year-end earnings and about 10% on trailing (earnings),” Dow said. “My guess is there’s still an advantage to investors. I think there is more upside after we get through this period of turbulence.”

He expects earnings to be good this year and sees strong economic growth next year.

“In the framework of long-term returns, a 5.25% bond is not bad; inflation is relatively low,” Dow said. “A 5.25% (bond) would be viewed as within the historic realm of lower valuation. My feeling is that stocks are still a victor in the risk management game for the next year or so.”