The Quiet Before The Holidays
“Anything you can do, I can do better”, or so it seemed once Mario Draghi took to the microphone and announced still more stimulus for the Euro-region. On top of the massive bond buying program from Japan, it was announced last Thursday that the European Central Bank (ECB) would increase bond buying by roughly $1.25 trillion. Even though it seems as we have heard it all before, the markets continued to rally on the easy money news. Back in the states, the monthly employment report remained above 200k in new jobs created, however wage growth was lackluster. In general the economic data remains good, but there are enough holes in any release to keep the bearish investors betting on an imminent market decline.
From solid GDP figures in the US to still growing retail sales, the weak labor income growth and stronger dollar stand in defiance of robust growth. Companies continue to use excess cash to buy back stock, even as they struggle to expand their overall revenue. Commodity prices are falling, which should feed more money into consumers’ wallets, but may also be an indication of weak global demand, especially for black gold. Coming into the holiday “buying” season, consumers’ may be singing: “Anything you can buy, I can buy cheaper.” The markets usually fall much quicker than they rise. Not this time, as the buying frenzy has continued relatively unabated over the past three weeks. Investor sentiment has gone from near despair back to near euphoria over the same three weeks. Had investors taken a three week nap, they would be wringing their hands about the still poor net number of advancing to declining stocks, low volume as the markets rise vs. when markets fall and valuations that are near the top of historical ranges.
What has kept investors buying with both hands has been the confirmation that global central banks, save for the Fed, will continue to push money out the door and keep “safe” alternatives, like bonds, from paying much interest. This effectively continues to force investors that are seeking some return ON their money into securities (like stocks) that may have a tough time providing a return OF investors’ money in the future. Acknowledging that the elections have ended (for now!) and the markets are in the best seasonal part of the year that extends into the first quarter of 2015, stocks may continue to rise well past the New Year. Just don’t be surprised by the large daily swings in stocks that may be along for the ride. While stocks maybe leaving investors scratching their collective heads, bond investors are watching yields fall even further than anyone expected early this year. However, there remains a very strong argument that they can fall even more in the months ahead. US rates are well above those of other industrial countries, and we are considered to be in a stronger economic position. The dollar remains strong, providing foreign investors with an added return on their bond income. A higher yield and a boost from currency…. what’s not to like! Inflation remains low and without significant growth in wages, it will be hard for any incipient inflation to be sustainable. The charmed life of a fixed income investor could continue for the next 6-12 months or until global wage growth gains traction.
The strong dollar once again bounced out international assets from the ranks of those above long-term average prices. While there remain tremendous opportunities abroad at much cheaper prices than similar companies in the US, the strong dollar has made it hard for US investors to make a buck. Small cap stocks, which should do well in a rising dollar environment, are having trouble winning the performance game against their large cap brethren. Fixed income alternatives, like REITs, utilities and even healthcare have been the primary beneficiaries of the recent market rally. In an environment where income seems to be the only determinant, valuations on many of the favorite income sectors and groups are well above historical norms. When the storms come to Wall Street, everyone is going to get wet. For the time being, the radar screen is blank and investors are buying with impunity. The near historic rise in stocks following the September decline has put valuations and investor sentiment right back where it was prior to the decline. A break from the frenetic daily pace is certainly warranted at this point, but investors may be very willing to buy/hold stocks during this seasonally strong period of time. Bond investors have once again been rewarded for their patience and will likely be the recipient of the investment dollars when stocks stumble again. The central banks, due to their recent easy money announcements have pushed out any rate increases until very late in 2015 at the earliest.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.