March Madness has come and gone, leaving in its wake a stock market that can’t seem to find investors willing to sell. The S&P 500 increased 3.75% in March and 10.6% for the first quarter of the year.
Attempts to sell stocks and drive the stock market down have been miserable failures for the past three months. A little over a week ago, the Labor Department reported that only 88,000 new jobs were created in March, a significant disappointment. “Experts” expected as many 190,000. The Dow Jones Industrial Average opened and promptly dropped 200 points on the bad news, but slowly crawled back all day and closed down only 40 points.
Bad news just doesn’t seem to affect this stock market. Five years ago, it was the opposite. In 2008/2009 it didn’t matter how much good news you threw at the market, rallies were short-lived. And any kind of bad news would send the market spiraling downward. Today, sell-offs are short-lived and the rallies are frequent. Volatility has almost completely disappeared from this market and the upward march is orderly and quiet.
Since the stock market bottomed in March 2009, it has gradually increased in value, finally erasing the 55% loss incurred during the 18 months prior to that spring. Stock markets like calmness and certainty. They don’t like noise and uncertainty. I have said in the past that stock markets don’t like Metallica. They prefer Enya. This economic environment isn’t even as loud as Enya. It’s more like Brahms’ Lullaby.
In March, the major headlines were about the economic crisis in Cyprus.
Cyprus? Economic crisis? Is this the most significant news the global/geo-political/economic/financial pundits can muster? The population of Cyprus is about half the size of Kansas City!
I’m not saying that what is happening in Cyprus is insignificant. But when Cyprus is the worst economic story in the world, all the serious economic problems have apparently been put on hold.
I pointed out in December that once all the potential economic uncertainties have been removed, this stock market was likely to move higher. I guess that was somewhat of an understatement. The last major uncertainty to be removed was the Fiscal Cliff which turned out to be as underwhelming as Y2K. With Cyprus being our primary economic disaster de jour, it’s easy for this stock market to find higher ground.
Ben Bernanke and the Fed have continued Quantitative Easing by purchasing bonds ($45 billion in mortgage-backed securities and $40 billion in Treasury securities EVERY MONTH) in the open market, holding interest rates down and bloating the Fed’s balance sheet. The artificially low interest rates on government bonds are a large part of what is driving the stock market higher. Stocks with dividends look relatively attractive when a 10-year Treasury bond pays less than 2% interest. Investors have conveniently short memories and are willing to take risk again in order to get a better return.
If this looks and feels like a stock market bubble à la 2001 and 2007 when we had artificially low interest rates, well, it probably is. But it has been looking that way for a long time and may continue to look that way for an even longer time.
Almost every day I receive emails with links to articles predicting economic gloom and doom. Interest rates are going to skyrocket. The stock market is going to crash. The bond market is going to crash. The Fed is out of control. We are going to have massive inflation. Buy gold. Sell everything and go to cash.
I’ve been receiving these for the past four years. During this time, I’ve also attended conferences where intelligent and knowledgeable experts have delivered similar messages. Ironically, since the end of February, 2009, the return on the U.S. stock market has been in excess of 130%.
The harbingers of gloom and doom may eventually be correct. They probably WILL be correct. And most of their assertions about government spending ARE correct. But as I have noted before, you can make correct economic predictions and look incorrect for a LONG time.
The economy continues to improve, but much like the Kansas City Royals, it continues to improve slowly, slowly with annual promises of greatness that are frequently misleading. At some point, the fan base gets weary of slight improvements and wants to see a real winner. This is one year where improvement in the Kansas City Royals might actually be better than the improvement in the economy.
Housing is showing some significant signs of life. Housing prices seemed to have bottomed. In some regions, prices have dramatically improved, although the largest increases in value are showing up in areas where prices were the most negatively affected during the real estate crash. Nevertheless, it is a relief to many that the value of their residence may eventually be worth what they still owe on it.
If you are a regular reader, you know that I like to ride my bicycle for exercise through my neighborhood. In the summer of 2007, I began counting real estate “For Sale” signs as I rode. In 2007, I had heard enough to make me think we might be entering a disastrous period for real estate and I thought it might be interesting to see how that played out in my neighborhood.
I counted seven homes for sale in 2007. Two years later (always riding the same route), I counted 26 homes for sale. For a couple of years, many of the homes were stubbornly the same ones. There were a few homes that stayed on the market for close to three consecutive years.
During my ride yesterday, I made a couple of observations. First, there were only eleven homes for sale, about the same as late last year. However, the homes which are for sale all seem to be different homes than late last year. This means that homes are selling even though other new homes continue to be listed for sale. I view that as a slight positive.
The Bank of Japan (BOJ) has decided to “out Fed” the Fed and is executing their own program of buying Japanese bonds, driving down interest rates on Japanese bonds and flooding the markets with yen. The Japanese 10-year government bond has a yield of just over ½% and the yen is plummeting in value which is exactly what the BOJ wanted. A cheaper yen makes Japanese products less expensive to foreigners which should translate into increased economic activity for Japanese manufacturers. Six months ago, a dollar would purchase less than 80 yen. Today, a dollar can purchase almost 100 yen, an increase of almost 25%.
This means that a Toyota just became less expensive for the U.S. consumer and a Ford just became more expensive for the Japanese consumer. That’s a trend that ultimately will not be helpful to the U.S. economy so you can bet that Ben Bernanke and the Fed are not in any hurry to take any action which would make the dollar appreciate even further against the yen (and other currencies).
The month of April is when most corporations announce 1st quarter earnings results. It’s possible that the steam could be taken out of the stock market if enough companies report disappointing earnings. But from where I sit, this stock market doesn’t really care what corporations are actually earning. Investors just can’t get enough return by investing safely and it’s been over five years since they got burned. As they listen to Brahms’ Lullaby, they are slowly plowing their money back into the stock market.
At Boyer & Corporon Wealth Management, we increased our equity positions several months ago and are in no hurry to exit yet.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.