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NEW YORK (CNN/Money) -
For two years, corporate profits have risen as the economy chugged along -- and the stock market has remained flat.
For nearly 18 months, the Federal Reserve has been pushing up short-term interest rates -- but long-term bond yields have drifted lower.
What does it take to get these markets out of neutral?
In fact, both the stock and bond markets seem to be dismissing current favorable economic numbers. And it's clear that they are discounting bad news ahead. What isn't clear is the precise nature of that bad news.
Of course, bearish forecasters can rattle off a list of things to worry about. Iraq isn't going well. The price of oil is sky-high. The federal deficit has soared. Inflation is up.
But so far, only the high price of oil and rising inflation are facts that could specifically affect corporate profits. And those risks seem overstated.
Adjusted for inflation, the price of oil in today's dollars peaked at $96 a barrel in 1979-80, compared with today's $63. And although the cost of finding new oil has risen over the past five years, it's still well below today's market price. That suggests that oil prices will eventually ease somewhat, even if they never return to $25 a barrel.
Inflation worries seem similarly exaggerated. On Friday, the Labor Department reported that consumer prices rose 1.2 percent in September, the highest rate in 25 years. But most of that was energy costs. The core rate, which excludes energy and food, increased by only a tenth of a percent for the month and only about 2 percent over the past year.
Moreover, if you look carefully at the stock and bond markets, you'll see that they are actually anticipating a recession, not an upsurge in inflation. If investors were demanding higher bond yields to compensate for anticipated inflation, long-term interest rates would be a lot higher than they are.
I don't see a recession on the horizon, but who can really know? It's possible that the Federal Reserve could tighten too much to head off inflation and accidentally bring the economy to a halt. Terrorism or an economic collapse in China might also trigger a slump. Or perhaps high consumer debt coupled with declining home prices will hold back consumer spending for the next several years.
Focus on share prices
Fact is, no one knows for sure what could go wrong.
Fortunately for long-term conservative growth investors, that's a question that doesn't need to be answered.
Good-quality stocks are relatively cheap. And blue-chip growth seems especially deflated.
For instance, General Electric's third-quarter profits rose 15 percent last week on a 9 percent gain in revenues, fueled by global growth. Yet despite such solid fundamentals, GE's shares trade at less than 17 times estimated 2006 earnings. Looking back, how often would you have regretted buying GE at such a multiple?
Historically, bad bear markets are sometimes accompanied by shallower slumps that may precede them or follow as an aftershock. It's entirely possible that could happen now -- but it's also possible that the outlook could brighten and stock prices could suddenly head up without such a secondary dip.
Such an outlook does create a dilemma for traders, who have to worry about where prices will be in six months. But for long-term growth investors, that question is -- or should be -- academic.
If you can buy first-rate stocks with earnings growth that averages more than 10 percent a year when those shares are trading at P/Es below 20, it's hard to see how you'll go wrong over the long term.
Many forecasters are saying that blue-chip stocks will likely return an average of less than 9 percent annually over the coming decade. But if you lock in double-digit earnings growth and a bit of a yield without overpaying, you should be able to outpace that pessimistic rate.
One worthwhile place to look for such stocks the Sivy 70 list. Build a portfolio around a core of picks like those, and you won't have to worry about the market's next zig or zag. And you can keep your eye where it should be, on retirement and your other long-term financial goals.
Sivy on Stocks resources:
Sivy 70: America's best stocks
Guide to Growth
Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Tuesday.