Globally, stock markets are on a tear and the U.S. stock markets are no exception. In the first two months of 2013, the S&P 500 is up over 6% and, as I’m writing this in March, it is hitting new highs. Last December I wrote, “We don’t feel stocks are horribly expensive and see some additional upside once the uncertainties are removed… particularly in foreign stocks that got blistered the past few years.” (Twinkies and Ding Dongs) I guess that was an understatement although foreign stocks, measured by the EAFE index, only increased a little over 4% in the first two months. Only.
The pending fiscal cliff was the final uncertainty I referred to last December. Congress and the White House summarily dispatched it just shortly after the eleventh hour. Since then, global stock markets have had very little to worry about. No presidential election. No fiscal cliff. No European defaults (in the near future). Nothing. All is quiet. Stock markets like quiet.
Sure, the sequester (a series of automatic budget cuts which went into effect March 1st) caused a ripple of concern. Because the sequester will likely reduce GDP, many investors were expecting a stock market decline. The budget cuts went into effect but apparently the stock market wasn’t notified. We will be facing another debt ceiling debate in a few weeks. If Congress does not act to raise the debt ceiling, the United States could potentially default on some of its debts. Don’t worry about that either because a default is not going to happen.
Meanwhile, jobs have been created, albeit slowly, causing unemployment to decline (although part of the decline in unemployment is that some people have stopped looking for jobs). Housing appears to have hit bottom and home prices have stopped plummeting. Recently, I have heard several anecdotal stories of houses going on the market and being sold within 24 hours. Five years ago, a lot of houses didn’t sell in 24 months!
The number of new home foreclosures continues to decrease every month. Below is a chart I have included from time to time. It shows the number of new foreclosures each month going back to 2005.
Over 350,000 new foreclosures were logged in one month at the peak in 2009, an annual rate of over four million foreclosures. In January 2013, over 150,000 new foreclosures occurred, the lowest total since 2007 (but still an uncomfortably high number).
The stock market sees nothing standing in its way. Quite frankly, it also sees very little competition for investors’ dollars. Why? The Federal Reserve Bank continues to do whatever it can to keep interest rates as low as possible. Since the Fed couldn’t reduce interest rates below zero, it bought mortgages in the open market to keep mortgage rates low and Treasury Bonds in the open market to keep other interest rates low. So far, those strategies have been effective. Yet, investors are increasing their risk and driving stock prices higher as they look for returns in excess of 2%.
Meanwhile, global capacity continues to be greater than global demand, keeping inflation in check. If you have been listening to the “gloom and doom” pundits for the past five years, you had a sizeable gain in your gold bullion investment. That investment has taken a significant haircut lately. It may take an even bigger one before resuming its long climb upward. The Fed’s policy of keeping interest rates low is artificial and distorts the actual supply/demand curve for fixed income. It’s not a matter of if but when the bond bubble created by the Fed begins to deflate and interest rates return to a normal market. The “gold bugs” will be rewarded then… but meanwhile, they may have missed out on one heck of a stock market move.
You can be “correct” in our business and appear to be “incorrect” for a long, long time.
Alvin Lee died last week at the age of 68. Mr. Lee was the lead singer and guitarist in the late 60’s/early 70’s for the rock group Ten Years After. Today, the band would be more aptly named Forty Years Before. Ten Years After performed at Woodstock and recorded the hit song “I’d Love to Change the World” in 1971. Google “Woodstock” if you are under 30 years old.
I was not a particularly devoted fan of Mr. Lee. I never purchased Ten Years After’s records. I mention him because the hit song had some ridiculously bad lyrics including the following line:
Tax the rich, feed the poor,
‘Til there are no rich no more.
Okay, that’s just absurd. Lyrics like this were not uncommon back then. Taking from the rich to help the poor has been a popular theme throughout history but I seem to remember the 60’s and early 70’s as being a little heavier in that department than other decades. Maybe it’s just me, but the theme seems to be picking up steam again.
Taken literally, this line is ridiculously stupid. Taxing the rich until no one is rich anymore means eventually everyone would be poor. This is a lesson that the Soviet Union has already demonstrated to the world.
I’m not saying we shouldn’t tax the rich to help the poor. At the risk of alienating a few of my conservative readers, I think we all have a responsibility to help those who, through no fault of their own, have a difficult time helping themselves. However, we need to be careful not to tax the wealthy to the point where there’s no one left to tax.
I don’t mean to pick on Mr. Lee. He was probably just trying to sell albums. But when entertainers make absurdly illogical statements, fans latch on and become standard bearers for an economic system that sounds fair but is doomed to fail. That’s the scary part.
We need to be careful to make sure that there are always people who are rich so that the poor will always have someone to take care of them.
At Boyer & Corporon Wealth Management, we are not nearly as excited about stocks as we were three months ago. We have ceased increasing our equity allocation but we aren’t running for the exits just yet. There continues to be very few economic or geopolitical uncertainties facing stock markets in the near future that would cause investors to worry. In addition to the stock market, we are settling for the meager returns we can earn in corporate bonds and private label mortgages. Yes, the same mortgages that blew up five years ago. Some municipal bonds still have decent value although the obscene investment gains we realized from that asset class are behind us.
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.