Last week I said that "The key to deciding whether anything is good or bad for stock prices is what it does to earnings, inflation and interest rates. Rising earnings cause stock value to go up, so that's good. Rising interest and inflation rates cause stock value to go down, so that's bad." So, rising earnings is good and rising inflation and interest rates are bad. What is the net effect of these conflicting forces?

The answer is given by The Truth Chart. The Truth Chart was introduced to our readers on March 21, 2003. It presents the eight possible combinations of rising or falling earnings, inflation and interest rates that can occur and indicates what effect each combination will have on stock prices. It also arranges the eight possible combinations, i.e., scenarios, in accordance to bull and bear market cycles and identifies where the Investment Climate is within the cycle.

For example, in the March 28, 2003 Climate Section of the Views, I said "With earnings trending downward, inflation trending upward and interest rates trending downward on average, our Truth Chart is telling us that we remain in the Case (8) scenario, looking forward to the end of the Bear market." We remained in this scenario until June 20, 2003 when inflation turned lower; then, on July 3, 2003, exactly five years ago, earnings showed an upward trend, putting the Investment Climate into a Case (2) scenario of rising earnings and falling inflation and interest rates, the classic "Goldi-Locks" scenario in which a Bull market thrives. The Truth Chart told it exactly the way it was. So where are we now?

Unfortunately, our Investment Climate indicators show that earnings are falling currently while inflation and interest rates are rising. This combination reflects a Case (5) scenario in which Bear markets begin. We have been in this scenario since March 28, 2008. Prior to that, the Investment Climate went from a Bull market to a Bear market scenario on February 15, 2008. It was no surprise. We could see this Bear market coming for months ahead of time. How did we do that?

Simply click on Graphs on the Main Tool Bar, select Market Climate Graph and check S&P Earnings and S&P Earnings - VV. Uncheck all other data, set the time Period to 5 Years and click on Get Graph. You could clearly see the path of rising; then falling earnings in the upper portion of the graph, and you could also see the trend indicator go from above 1.00 to below 1.00 on February 15, 2008. What could be clearer than that? You may also wish to read my essay of October 13, 2006, called "The Bull/Bear Market Indicator." OK, so when will this Bear market end?

According to what our Investment Climate indicators and the corresponding Market Climate Graph are showing for S&P 500 earnings, it's going to be many months, perhaps a year or more, before we see a Bull market scenario identified by The Truth Chart.