Eye on Wall Street: Don’t confuse brains with bull market
The headline is a phrase worth remembering. Just like the one that says you are not as smart as you think you are in a bull market, nor as dumb as you think you are in a bear market.
Since the Panic of 2008 it has been difficult to not make money in the financial markets. Great valuation (stocks were cheap!) and an accommodative Federal Reserve hell bent on keeping interest rates low to get a “wealth effect” going to help the economy, were a winning combination. Stocks in the S&P 500 are up over 150 percent since the devilish 666 lows of March 2009.
But it’s starting to get tougher. Interest rates have risen sharply this year and stocks are fair value at best — they are certainly not cheap anymore. Bonds (10-year Treasury) look a lot better, but rates are still low at just under 3 percent. Bonds still have modest expected returns over the longer term.
The macro fundamentals have certainly improved since the dark days of 2008. And the U.S. financial system is much stronger now. But, this economic recovery has been sluggish with growth at about 2 percent, or half the rate one would normally expect after coming out of recession. The unemployment rate has come down from its high of 10 percent, but it is still 7.3 percent compared to 4.6 percent in 2007.
At their September meeting, the Federal Reserve acknowledged slow growth this year and cut their forecast for growth next year by 0.25 percent to 3 percent. They reaffirmed an accommodative stance, pledging to keep short term rates (fed funds) near zero for a couple more years. In his press conference, Ben Bernanke said it might take until 2018 before rates get back to normal — that is about 4 percent on short-term rates.
The big shock coming out of the FOMC meeting was the Fed’s decision not to taper its monthly $85 billion bond buying. The Fed had seemly drawn a red line telegraphing a reduction beginning in September and ending the program by the middle of next year. Now they say it is data dependent with no set timetable. Presumably the still high unemployment level and jump in mortgage rates unnerved them. And the fact that inflation remains well below their 2 percent threshold made it an easier decision.
Lean to the left. Lean to the right. Stand up. Sit down. Fight, fight, fight. That old college cheer pretty much sums up politics in Washington these days. The fight over the federal budget and debt ceiling are just the latest in a string of battles. Ultimately they will get resolved, but not before much angst.
These struggles and general uncertainty — regulatory, tax, etc. — are weighing on business and hurting the economy. In fact recent work by the Federal Reserve of San Francisco suggests the unemployment rate would be a full 1 percent lower in absence of “policy uncertainty.”
Stocks rallied in September as many early worries faded away — Syria and Fed tapering, to mention a few. The S&P 500 reached a record high mid-month and was up over 5 percent at one point, but closed September with a gain of 3.1 percent. It’s up 19.8 percent year-to-date. Overseas equities did even better as the Eurozone emerged from recession and Japan kept up its massive monetary and fiscal stimulus. The broad EAFE index gained 7.4 percent last month.
The emerging equity markets made quite a comeback, gaining 6.5 percent and bringing their year-to-date performance to -4.4 percent. A dead cat’s bounce? We don’t think so.
Even bonds improved. After touching 3 percent, the 10-year Treasury ended the month at 2.61 percent and the Barclays Aggregate bond index posted a 1 percent gain, the first monthly gain since April.
Jeff Pantages, CFA, is the chief investment officer for Alaska Permanent Capital Management, a $2.4 billion investment management and advisory firm located Anchorage.