Stocks are up like 10% over the last couple of weeks.
There have been days where 400 of the 500 stocks in the S&P 500 have rallied, which
is historically an incredibly bullish indicator.
But why?
Everything else (everything other than the stock market itself) looks so grim.
We still have the same (if not heightened) threats of war that existed a couple of weeks
ago.
The yield curve on the bond market is once again inverted suggesting a high probability
of a near-term recession.
Inflation is now up to 7.9% (at least according to the official narrative, the CPI) - if they
were using the same methodology as before to measure it, it would be well into the teens
…at the very least - if they found a more accurate way to account for inflation’s
effect on rent, it would be up way higher that even.
On that note, you have the Fed WAY behind on inflation, making these negligible rate
increases, because they’re stuck between a rock and a hard place (which we’ll circle
back to at the end) - in fact, the 2 year treasury suggests the Fed is now further behind
on inflation than it was before its first hike a couple of weeks ago.
The list goes on, but you get the idea.
That all begs the question that you should ask yourself: why are stocks climbing right
now despite all this?
– Welcome back, you brilliant 17,000 subscribers.
My name is Stephen Spicer, and I want to help each and every one of you.
So let’s start by addressing this question: why are stocks climbing right now despite
all the doom and gloom hitting us from pretty much every other financial angle?
Did stocks all actually just get that much more valuable?
Or could it be something as nefarious as manipulation …because quarter end is coming and funds
need to juice their returns as much as possible before reporting…?
Or is it instead as innocent as a whole bunch of short covering?
Where those same fund actors got overzealous on the way down and are all trying to cover
their positions at the same time…
Maybe a little of both.
Or maybe something else altogether…
I don’t know!
But…
it doesn’t matter.
The more important question for you (as an investor, as a saver) is whether or not this
rise in the stock market is sustainable?
And - if you adhere to the stock and bond only mantra of the financial industrial complex
- then you should add to that, what about bonds?
Cause they’ve been making some foreboding moves of late…
From the New York Times: “The Bloomberg Aggregate Bond index … was
down 6.2 percent this year.
That puts it on a course for its worst quarterly performance since 1980.”
“The Bloomberg Global Aggregate index, a comparable measure of global bonds, was down
6.6 percent so far this year and off 11 percent from a high in January, one of the worst drawdowns
since that index’s inception in 1990.”
Think about that for a bit.
If you’re just a stock investor, you don’t hold or really care that much about bonds.
Well, first of all, you should care about bonds - not because you need to own them,
that’s not what I was going to say - but rather because the bond market is WAY bigger
than the stock market - and so the way that it moves can actually provide us with some
good indicators about the economy.
But rather my point here is that you may not view a 6% loss so far this year as THAT bad.
Because you’re used to those swings in the stock market.
But I challenge you to think about a bond market investor’s conservative expectations.
A greater than 6% loss over a single quarter is a lot - that’s an annualized 24% - from
what’s supposed to be the conservative piece of your investments.
Bond investors know there is not near as much return potential with bonds (especially with
rates as low as they are today - more on that in a second).
Instead, a prevailing reason to own them is to mitigate your overarching risk.
And if you’re the type of person watching this, then you of course know that the stock
market is also off to a rocky start.
Despite the recent boost cited at the top of the video, the S&P 500 is still down around
5% on the year and the Nasdaq, more than 9%.
Again, from the New York Times…
“The double whammy of bad bond returns combined with poor stock market returns in the same
stretch leaves many diversified stock and bond portfolios in a state of distress.”
Man… it’s almost like it would have been really nice if someone had said this was even
possible in a really easy to understand way… maybe then so many wouldn’t have been caught
off guard…
oh wait… there’s this book I read where it talked about exactly that…
it’s called Stop Investing Like They Tell You…
I know, who am I to challenge the traditional investment paradigm…
Why should you listen to me?
I get it.
I’m not going to twist your arm.
I’m pretty much a nobody in the financial world.
And there is definitely plenty that I do not yet fully understand.
But I also believe that one of the biggest differences between me and many other people
out there expressing some sort of opinion on all of this is that…
I’ll admit that.
And I’ll never stop trying to strengthen my grasp on how all these things are tied
together and affect each other and most importantly…
finding ways to help myself and others overcome these issues.
So, when I’m talking about this risk in my book, I point out the fact that the assumptions
used for most advisors and pundits' bond market projections are based on the returns the bond
market has experienced relatively recently.
And I think that’s a terribly misleading practice that’s going to leave many investors
disappointed and surprised by their results.
In the book, I suggest considering the worst periods for bondholder returns (in order to
better mentally prepare yourself for whatever might happen in the future).
It says…
“Because, honestly, I don’t think that’s too unrealistic an assumption for the more
immediate future of bond performance.
Warren Buffett agrees: ‘Bonds are not the place to be these days…
Fixed-income investors worldwide—whether pension funds, insurance companies, or retirees—face
a bleak future.’
“Remember: bonds have a low correlation with stocks and things that are uncorrelated
tend to move independently.
Meaning, both stocks and bonds could do well at the same time, stocks could do well while
bonds do poorly and vice versa, and of course … both stocks and bonds could perform miserably
over the same period.
“Bonds have been a welcome addition over the last several decades, as they have been
in a raging bull run (to the extent a relatively tame bond-bull can rage).
This has correlated with the gradual and extended decline in interest rates since the 1980s:
in other words, interest rates and bonds are negatively correlated.
When interest rates go up, bonds do poorly.
Interest rates go down, and bonds do well.
“Today, however, interest rates are touching 0%.
Last time they were this low, the following decades did not bode well for bondholder returns.
Consider the decades before our current bull run began.
From 1953 to 1981, as interest rates rose from roughly 1% to almost 20%, bonds averaged
an annual return of only 0.2% after inflation.”
And honestly, I fear this time around will be worse for them, given the state of everything…
Ray Dalio has also of late eloquently concluded, “The economics of investing in bonds has
become stupid.”
Even the New York Times accepts the possibility…
“From a longer vantage, the August 2020 trough may just possibly have marked the end
of a 40-year bull market in bonds.”
What does all this mean for our investing futures?
Well, as with all this stuff…
it’s complicated.
That’s why I think it’s so important that you really know and understand (or find an
advisor you really trust knows and understands) what you’re investing in and do not just
follow some blanket rules of thumb (like the oft-parroted stock and bond, buy and hold
regurgitations).
That’s why we spend so much time on this channel doing real deep dives.
But with regards to this particular question, here’s what I mean when I say “it’s
complicated”:
The same stocks that performed well and experienced an environment perfect for them to thrive
during this bond bull run would likely find it much more difficult in an environment of
rising rates like the 1970s.
Think: stocks with high expenses and no profits; stocks that require a lot of capital to get
going (investor capital or debt - both would become more and more limited in this type
of rising interest environment).
An entirely different class of assets performed better during that prolonged bond bear market
back in the ‘70s: commodities, natural resources, foreign stocks, emerging markets, and so on.
But it’s not as easy as picking one or the other here.
The future fed funds rate policy is not obvious - that’s where it gets especially complicated
here.
I don’t expect it to look like this chart from the past.
Their policy would be obvious (much more so at least), if the economy were as healthy
as the Fed is saying that it is.
Because, we might see rates increasing as quickly as they did in the 1970s.
But, they aren’t doing that, because… the economy is not actually as healthy as
they say and, well, … they couldn’t do it even if they wanted to - not without disastrous
consequences at least.
I talked about that issue in great (and entertaining detail) in this video.
I look forward to hearing from you in the comments and seeing you over there as well.
Welcome to the family!
I wish you all the best.
Take care.