It’s tough to not see so many asset classes moving in the right direction while the economy and the globe seem to remain in constant turmoil and wonder what’s going on. US equities continue to break new interim highs and more recently, all-time highs. Treasury bond yields continue to sink to historic lows, with mortgage rates following, and we have had some positive home price moves finally. Here are some thoughts on each:
- Stocks – US equities have been on a complete tear, up over 12% YTD, and 131% since the March market lows if you were lucky enough to buy at the pivot bottom. That does not include dividends. People had often equated stock market performance with the economy, but this time does in fact seem different. The economy is pretty stagnant, joblessness remains quite high, tax rates are increasing, the stimulus spending has ceased and sequestration isn’t helping. Yet, stocks continue to rally. In some ways, it’s a self-fulfilling prophecy. See, during the recent recession, firms were in a relentless survival mode, cutting all forms of spending possible, often fixed costs like salaries. These layoffs resulted in new ways of doing things, often automation and outsourcing. Well, now that demand has finally picked up, companies are simply scaling these newly efficient processing. Hiring in higher paying, high skilled jobs has simply not picked up. This has helped boost bottom lines. Corporate profits are at an all-time high. And then with bond yields at record lows, companies are borrowing like mad (i.e. Apple’s announcement this week) to simply buy back their own stock or issue dividends. This prevents them from having to repatriate funds from overseas, saves them money on their tax bills and shifts equity and dividend payments over to investors. It’s a virtuous cycle. Probably won’t end well, but it may last years.
- Bonds – You’d think all this money flowing into stocks would have been due to a great rotation out of bonds into stocks, but not the case. Funds are obviously still flowing into bonds given the record low yields. QE is driving much of the directional movement, but also fear. Large funds seeking refuge will sooner take a near-zero yield then chase more volatile stock returns and there’s little inflation to speak of in such a weak economy, so inflationary pressures aren’t driving yields up either.
- Housing – We just had a recent report that home prices were up nationally 9% year over year. It’s been over 7 years since we’ve seen a jump like that in home prices. It may just be a temporary blip, but I think this one may be for real. I’ve been so bearish on housing for so long primarily because of the jobs situation and the economy, but eventually, when the tide turns and people start rushing into housing again for fear of missing a rising market, we’ll see a new bubble form quickly. I’ve seen the euphoria already with a recent family member purchase and then our neighbor just listed their house and had it under contract the very first day they showed it. These are anecdotes, but the next day, another realtor showed up at our door asking if we’d sell our house for $20,000 more because they were angry they didn’t get to show their clients the house that just sold. We’re not even in a hot area! I can sense a new rush into housing from people who have been sitting on the sidelines waiting for the conditions to improve.
With these trends in mind, what trading moves are you making? Anything different than normal or just set it and forget it?