Green Shoots - Tulips or Weeds
While a stock market rally after the March 9 low was expected and called for, 9 weeks and 30%+ later, it has surprised many people, including us, in its size and duration. Is it 1982 all over again?
If you recall, the bear market rally never ended, despite the poor fundamentals and technicals. Fast-forward 2 1/2 decades and it's a similar picture. Will the market 'melt up' and pull the economy with it?
Back then, interest rates were on their way down from being over 20% - today, they're already at 0%. The latest phrase to explain the current rally is "green shoots" - small improvements in the economic and corporate data. Don't get me wrong, growth is still in decline, it's just not falling as much as expected, and that's being interpreted as good news (check out the following link to the Wall Street Journal: http://online.wsj.com/article/SB124208415028908497.html). Ultimately we will need to see growth at the end of the tunnel so, where is it going to come from?
The consumer is the growth engine and their ability to consume has been seriously curtailed - rising unemployment and shrinking investment portfolios. They used to be able to borrow against the equity in their home but that's gone too. Besides, the easy money is gone. Those who were handing it out are all out of business. So governments and central banks are filling the void by acting as spender and lender of last resort. Can they keep it up until the consumer is back on her feet or, are we facing a Japanese economic scenario - domo arigato?
So, bear market rally or, bull market?
We think the question to ask is: depression or recession?
Our answer would be recession - There's just too much fiscal and monetary stimulus on a global basis for a depression to unfold. Which means corporate bond yields are still very attractive. In fact, year-to-date they've outperformed stocks as spreads continue to narrow plus they offer better capital protection.
Another question to ask is deflation or inflation?
We think deflation is the shorter-term risk and inflation, possibly stagflation, is the longer-term risk. In either case gold/gold stocks would be a good investment. Gold's recent weakness is an indication that it was being used as a safe haven along with US Treasuries. As risk appetites have risen, money has flown out of treasuries/gold and into stocks, driving yields higher/gold price lower and stocks prices higher. Quantitative easing should keep treasury yields in check but gold could experience pullbacks on stock rallies. We would view these pullbacks as buying opportunities.
To discuss our outlook and our asset mix, sector, and security recommendations, feel free to give us a call or sign up for the next Friday Morning Coffee on Friday, June 5. This will be the last Friday Morning Coffee before we break for the summer so don't miss it. Let me know if you and a guest would like to attend. We'll try and squeeze a few more bodies in but space is limited.
If you recall, the bear market rally never ended, despite the poor fundamentals and technicals. Fast-forward 2 1/2 decades and it's a similar picture. Will the market 'melt up' and pull the economy with it?
Back then, interest rates were on their way down from being over 20% - today, they're already at 0%. The latest phrase to explain the current rally is "green shoots" - small improvements in the economic and corporate data. Don't get me wrong, growth is still in decline, it's just not falling as much as expected, and that's being interpreted as good news (check out the following link to the Wall Street Journal: http://online.wsj.com/article/SB124208415028908497.html). Ultimately we will need to see growth at the end of the tunnel so, where is it going to come from?
The consumer is the growth engine and their ability to consume has been seriously curtailed - rising unemployment and shrinking investment portfolios. They used to be able to borrow against the equity in their home but that's gone too. Besides, the easy money is gone. Those who were handing it out are all out of business. So governments and central banks are filling the void by acting as spender and lender of last resort. Can they keep it up until the consumer is back on her feet or, are we facing a Japanese economic scenario - domo arigato?
So, bear market rally or, bull market?
We think the question to ask is: depression or recession?
Our answer would be recession - There's just too much fiscal and monetary stimulus on a global basis for a depression to unfold. Which means corporate bond yields are still very attractive. In fact, year-to-date they've outperformed stocks as spreads continue to narrow plus they offer better capital protection.
Another question to ask is deflation or inflation?
We think deflation is the shorter-term risk and inflation, possibly stagflation, is the longer-term risk. In either case gold/gold stocks would be a good investment. Gold's recent weakness is an indication that it was being used as a safe haven along with US Treasuries. As risk appetites have risen, money has flown out of treasuries/gold and into stocks, driving yields higher/gold price lower and stocks prices higher. Quantitative easing should keep treasury yields in check but gold could experience pullbacks on stock rallies. We would view these pullbacks as buying opportunities.
To discuss our outlook and our asset mix, sector, and security recommendations, feel free to give us a call or sign up for the next Friday Morning Coffee on Friday, June 5. This will be the last Friday Morning Coffee before we break for the summer so don't miss it. Let me know if you and a guest would like to attend. We'll try and squeeze a few more bodies in but space is limited.
Labels: Rallies and Reversals
posted by David Allard at
11:15 AM
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