Tahoe Market Pulse: On stocks and bonds, and the wall of worry
June 24, 2015
Several market indexes reached a new high, with small-cap stocks leading the charge. Even after seven years and more than 200 percent, this bull market is one of the most unloved and under-appreciated.
Maybe it's because investors still feel the sting of 2008. Or is it from all the chatter that market strength is simply due to cheap quantitative easing money?
The Fed's QE has no doubt played a large role in the market's strength. Low interest rates have resulted in the TINA (There Is No Alternative) environment that I've written about for years.
There's more to it than that, however. Profits have soared, too. They'll grow more when the macro environment improves. It will, someday.
At last week's Fed meeting we learned that the Fed will continue its zero interest rate policy and that they'll likely raise rates later this year.
The media is obsessed with when they'll begin to raise rates, but Ms. Yellen's message was that the path to higher rates is more important than the timing, and that path will be gradual.
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Meanwhile, long-term interest rates have already moved higher. The ten-year Treasury, which was recently yielding a paltry 1.64 percent, now yields 2.4 percent.
Why are people selling bonds? Some expect faster economic growth, while others are spooked by world events. The speed of the sell-off is also due in part to illiquidity in the bond market.
With the rise in long-term rates, bond yields went from very little to … well, still very little. Bonds don't offer tempting competition for stocks. Translation, the TINA environment continues.
Of course, interest rates will rise someday. Count on it. Whether it will be in the fall, as many believe, or next year as the IMF recommends, no one knows.
That will depend on future economic data. Also not clear is a reason to raise them at all. The economy will once again grow by two percent this year, give or take a bit, and inflation won't reach the Fed's target (2 percent) this year.
There is a saying, "The hardest time to invest is always right now." Until most investors are comfortable buying stocks this market will continue to climb its wall of worry.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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