markets

Viewing posts tagged markets

29 Mar 2023

Banks: Canary in the Coal Mine?

By glen

We’ve been through a lot over the last three years.  It began with a once in a century pandemic that we were fortunate to survive.

To protect against another Great Depression, the Federal Reserve and Congress made it rain money, which helped keep homes and businesses afloat.  These actions had many unintended consequences.

It feels like we’ve been through a generation of crises in only three years.

  • Inflation become unhinged in a way we haven’t seen in forty years
  • The drop in stocks and bonds last year rivaled the worst bear markets in history
  • Falling real estate values in many areas was on par with the housing crisis
  • A strange speculative bubble came and went in crypto currency madness

Any one of these events in the financial world, in a vacuum, would have been a catastrophe, but in this era it’s been par for the course.

We’re now heading into what may be the last chapter of pandemic era financial stress.  The Fed has been aggressively increasing interest rates to combat runaway inflation, which slows growth by making it more expensive to borrow.  Three months ago we were expected to be in a recession by now, yet we’ve had a stellar first quarter, a testament to the strength of this economy.  But cracks are finally beginning to form, and those cracks are in banks.

To be clear, this is not a situation where you should pull your money out of banks despite two recent failures.  It rarely makes the press, but small town banks do fail, and the FDIC steps in to unwind them.  We have a lot of banks in the US.

A recent Bloomberg op-ed notes: “Canada has fewer banks than the state of North Dakota.”  Recent events have been eye popping because of the size of the banks that failed.  The US Treasury and FDIC have basically guaranteed all deposits at this point to assuage everyone, meaning everyone globally, our banking system is that important.

Silicon Valley Bank and Signature bank were victims of poor management and classic runs.  Deposits were pulled in a panic, and the banks were forced to sell bonds at losses on a massive scale to meet the demand for cash, which crushed them.

While deposits are implicitly protected, all banks are under similar stresses.  They must hold a certain amount of very safe bonds as capital, these requirements were bolstered coming out of the great recession.  These bonds have dropped in value with increasing interest rates, which means many, if not all, are holding massive amounts of bonds at a loss.  This gets ugly if they are forced to sell, which is how runs feed on themselves.  Either way, bank balance sheets are in a fragile state because they all face similar requirements.

Regulators were certainly aware these issues were festering across the board, but between the capital requirements and increasing rates, everyone is holding the same bad hand.

Regulators, facing public glare, will insist they improve balance sheets as quickly as possible, which means lending standards will tighten.  Over the next several months this will create another drag on the economy.  Banks lending less means businesses of all sizes will have less working capital.

The ironic upside, this dynamic will cool inflation.  Inflation still needs to drop by at least 50%, and the bank balance sheet contortion will mark the beginning of the end of rate increases for the Fed because it can’t afford to trigger another full-blown crisis.

The bottom line: the bank balance sheet issue could mark the catalyst for the long-anticipated slowdown.  Over the last several months expectations for a serious slowdown or recession have shifted to midyear, and this aligns with that timing.  While stocks will not like this, they haven’t gotten too far ahead of themselves coming out of last year’s brutal market.

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

 

25 Aug 2022

ESG Investing: It’s Not Easy to Invest with Heart

By glen

 

Environmental, Social, and Governance Investing, or ESG is a hot topic right now.  You may have seen ESG options in your employer’s retirement plan, or advertisements for this “style” of fund or index.

 

What the Heck is ESG?

ESG is a Wall Street trend that gets beyond just financials by looking at how corporations address broader societal goals.  It asks: how is this company functioning as a citizen?  This thinking evolved from the idea of corporate social responsibility.

The idea: a corporation has responsibilities beyond answering to shareholders, and shareholders should want to invest in companies that are good citizens because focusing on all stakeholders is good for society, and good for a sustainable bottom line that looks beyond just the next quarter.

This idea has been boiled down to three big categories: environmental concerns, social concerns, and governance concerns.  Let’s take a quick look at each of these:

Environmental Concerns

These include the topics of climate change and environmental sustainability.  It looks at the impact a company has on global warming and natural resources.  The thinking: current environmental trends are unsustainable.

Social Concerns

These include: diversity, human rights, consumer protection, and animal welfare.  If you’re thinking it sounds like this could get political, you’re right, and it’s more tedious than it sounds.

Corporate Governance Concerns

Topics are wrapped around management structure, employee relations, and compensation.  The question this gets to: how is the company managed, how does it treat employees, and how is everyone hired by shareholders paid?

What Does ESG Investing Look Like?

Without getting into the weeds, you can see how these topics may be important to an investor.  We have a classic situation, an investor need has been identified, and Wall Street has cooked up a solution for you!  Is this out of the kindness of their hearts, or out of grave concern for these topics?  Of course not, it’s to get paid.

Wall Street has been in the process of building ESG indexes, ESG funds, and ESG ratings.  Here is a simple example.  They will take something like the S&P 500, the 500 largest stocks in the US, an important bellwether, remove stocks based on “ESG factors”, and then sell you an ESG fund that costs more than an S&P 500 fund.  Now, the thinking goes, you are a responsible investor, and now you can sleep better at night knowing your investments are making the world a better place.

Of course, it’s too good to be true.  Let’s look at why.

The Problems With ESG

In May Tesla was removed from a popular ESG index because of issues with “rampant racism,” and crashes associated with autopilot technology.  Racism is never justified, and faulty safety technology that kills people is never a good thing; however, it’s hard to debate that Tesla has been significantly moving the needle on auto carbon emissions with it’s own vehicles, and by forcing competitors to quickly come up with electric vehicle offerings.

If you take this one example, and imagine how environmental, societal, and corporate governance issues may intersect through a single lens that tries to boil a very complex ocean, the entire proposition becomes dicey, especially for an investor whose primary goal is to earn a good return, which is all of us.

From a recent Harvard Business Review article: “It’s long past time we faced a hard truth: despite a historic surge in popularity, ESG investing will not tackle our generation’s urgent environmental and social challenges…Yet it’s hard to blame casual observers for believing that investing in an ESG investment fund is helping to save the planet.”

From The Economist: “although ESG is often well-meaning it is deeply flawed.  It risks setting conflicting goals for firms, fleecing savers and distracting from the vital task of tackling climate change.  It is an unholy mess that needs to be ruthlessly streamlined.”

These examples go on, and of course in the current political climate ESG is painted as a vast left wing conspiracy.  There have been a slew of op eds in the Wall Street Journal to this point.

Another related issue that is seldom discussed, bonds.  Most of the ESG discussion focuses on the stock holder perspective; however, a diversified investor owns bond funds as well.  A bond holder is still providing capital to corporations.  There are far fewer ESG bond funds, and this type of analysis in the world of bonds is even more complex.

In a time of low yields, bond investors have less flexibility given the performance required from the bond side of a portfolio.

Considerations for a Concerned Investor

The important point here is to not simply invest blindly in an ESG fund, and believe you are somehow achieving a personal goal related to what’s important to you under this broad ESG umbrella.

The ESG funds are twisted and contorted when it comes to the goals they are trying to achieve; therefore, any single goal that is important to you may or may not actually be achieved.  To make matters worse, your returns may suffer compared to conventional funds, and those differences add up over time.  Don’t forget, you’re also paying higher fees for this privilege.

 

The Economist, a very old and conservative British newspaper, had one conclusion: “ESG should be boiled down to one simple measure: emissions.”

If this topic is important to you, there are funds available that only address climate change, and this kind of laser focus can be successfully achieved for certain parts of a portfolio, namely indexes of large US companies.  Attempting to bring this focus to other areas such as small company stocks, international investments, and bonds quickly becomes a more complex proposition.

The bottom line is that your long term wealth is too important to risk the gamesmanship and conflicting interests in the current world of ESG funds.

Please reach out if you would like to discuss ESG funds, or funds that may tackle specific issues that are important to you.

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

02 Jun 2022

The Hangover: Too Much Money

By glen

The Big Cash Party

As the worst of pandemic fears fade into memory it’s easy to forget the panic of 2020.

A “shutdown” had never been attempted, and amid the fear, uncertainty, and market panic, the Federal Reserve did the only thing it could do to help: print money.

It printed $4 trillion.  While this didn’t involve literally running the printing press, it created that much cash out of thin air.  What they really did was buy bonds on a massive scale.  When the Fed buys a bond from a bank it gives the bank cash for the bond, and that cash is freshly minted on the spot.

The flood of cash was helpful during the worse of the pandemic, it kept the markets lubricated and functioning relatively normally.  The fresh, new cash was the spiked punch in the punchbowl.  Cash in hand, investors bought everything they could.

Bond prices ran up, pushing interest rates down.  Stocks moved to record highs on valuations that made little sense.  We saw crypto currencies move into the spotlight and surge.  We saw home prices take off on cheap mortgages.  We saw new inventions like NFTs spike.  Why were people paying steep prices for things like the exclusive right to an NBA slam dunk video?  The list keeps going.

People were flush with cash, stuck at home, and drinking the Fed’s spiked punch.  To prevent a panic the Fed kept the punch flowing for too long, which they’ve now admitted.

The punch bowl was allowed to run dry in March when the Fed stopped buying bonds, and began increasing interest rates.  The hangover begins.

The Hangover

When lots of new cash is printed, under normal circumstances, the result is a spike in inflation.  Because of the complexities of the pandemic world it took a long time for the inflationary fire to get started.

The Fed was caught off guard, and did the only other thing the Fed can do, destroy money.  It began raising interest rates, told the markets it will keep raising interest rates, and announced a plan to start destroying some of the newly printed cash.

The bottom line: with cash leaving the economy en masse, the tide is going out.  This hangover has two painful symptoms: the inflationary fire caused by the high proof punch, and the Fed’s action of taking away the punchbowl by pulling out that cheap, new money, which puts downward pressure on almost all financial assets and growth.

The economy survived the pandemic, but now we’re in a painful place.  We see costs rising in real time, and our investment portfolios have taken a bruising.

Let’s look at stocks and bonds.

Bonds

Inflation is kryptonite to bonds.  As prices rise the purchasing power of bonds is eroded.  Prices and yields have a seesaw relationship.  When yields go up, prices go down.  Since bonds are expected to compensate for inflation, as inflation has increased, bond yields have increased to keep up, pushing prices down.

This is being exacerbated by a Fed that: stopped buying bonds (printing cash), began increasing the Fed Funds rate, which pushes all rates up, and burning money by letting bonds it owns mature without reinvesting the cash.

We haven’t seen this since the 1980’s, but it’s the same playbook.  The only way to put out an inflationary fire is to make money more expensive.  In the world of bonds what’s happened so far this year is as rare as it is painful.

The good news, the worst may be over for bonds.  The bond market is looking over the horizon, and sees a slowdown coming.  The bond market sees a Fed that could be forced to begin cutting rates in less than a year to combat a recession it helped create.  You read that right.

Stocks

If the bond market was the somewhat reserved partier through all of this, the stock market was like the cast of Animal House.  Stocks spent most of last year exceeding any reasonable valuations, and chanting drinking songs as if the speed of the pandemic recovery would be the speed of growth forever.  It was bizarre.

In January an inebriated stock market looked around and saw the bond crowd piling into Ubers, and realized the party was over.

Stock prices now only look fair in terms of bloated estimates that still haven’t come down.  The hangover could worsen here as prices begin to reflect an economy that is slowing down.

Despite the pain, with a long term perspective, stocks have a better shot at fighting inflation.  As inflation rises, companies charge more for goods and services, which allows earnings to keep up with inflation.  While earnings may drop with an economic slowdown, price increases offset the bite of inflation in the long run.

Wrapping It Up

The hangover has been painful, and the pain is likely to continue, possibly to the point of a recession within the next twelve months.

The Fed did what it had to during the depths of the pandemic to keep the economy from unraveling.  Printing, or destroying money, is always a blunt force that lacks precision.  The system doesn’t turn on a dime, and The Fed waited too long to take the foot off the gas.

Bonds may have turned the corner in that they are now rising as stocks drop, which is the typical relationship as investors seek the shelter of bonds amid uncertainty.  Inflation is close to a peak, and should begin a long road back to “normal.”  Stocks are getting close to reasonable values, but remain rocky.

The good news: we still have a functioning economy, something that shouldn’t be taken for granted.  The bad news: it’s been a wicked hangover that’s probably far from over.

Hopefully, this is the beginning of the final chapter of the pandemic’s impact on the economy.  It was quite a “party.”

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities. 

16 Feb 2022

Removing Life Support: Post Pandemic Challenges

By glen

 

When the pandemic began, the world’s largest economy was put into what can be thought of as a medically induced coma. The Federal Reserve and Congress took steps to ensure the patient would survive a trip to intensive care like no other. The world’s largest economy had never been put to sleep intentionally, and then revived.

Congress passed legislation to support employers, and employees, with things like paycheck protection, PPP loans, direct payments, and supplements to state unemployment benefits.

The Federal Reserve or “Fed” did what it knows how to do. It lowered interest rates, and printed a ton of money. The Fed essentially printed over four trillion dollars, that’s $4,000,000,000,000, for those who like to look at numbers. This flooded the US and global economies with cash.

These actions worked better than many expected. During 2021, the economy rebounded, and is now on a trajectory to pre-pandemic levels. Strong medicines can have strong side effects, and the most fearsome side effect of printing money is inflation.

The Fed had expected the inflation surge to pass quickly; however, supply chain issues caused inflation to become intrenched.

Wage increases became common, and are usually seen as a good thing. Who doesn’t like to make more money? However, as prices rise, wage increases are struggling to keep up. This begins what’s often called a “wage price spiral,” and it’s not a healthy pattern.

Most economists agree that it’s time to wake up the patient, and move out of intensive care. This analogy is important because if you’ve ever known someone who was in intensive care, the journey back to health is long and challenging. The economy became hooked on cheap money, and because of the inflation flare up, the Fed will have to move much faster than expected.

Next month, the Fed will stop buying bonds, which was a way of printing money, and is expected to begin increasing the fed funds rate. The fed funds rate is the overnight rate banks charge each other. It’s like the mother of all rates because it informs and influences everything from corporate bonds to car loans.

The market lives for expectations about what’s going to happen next. Last fall, the expectation was that the fed funds rate would increase 2 or 3 times this year. Each move is generally 0.25%. Inflation has become so wild that the expectation is now five to seven hikes this year.

For reasons I won’t bore you with, higher interest rates are generally the only way to tame inflation. For those of you old enough to remember, this was painfully, and successfully, demonstrated by Fed chair Paul Volcker in the 1980’s.

Now markets face a variety of challenges, which feed on one another. Just to give you a sense, here are a few of them:

• When interest rates go up, the price of bonds fall, hurting the “safer” side of portfolios
• When interest rates go up, stock prices tend to drop because it costs companies more to borrow, and new bonds at higher yields become tempting to investors when compared to stocks
• When interest rates go up, mortgage rates go up, making housing seem more expensive

The list goes on, but those examples really get to the point. It quickly becomes a sticky wicket for the Fed.

Rates will have to go up, and as you may have seen, this is already playing out in bond yields and mortgage rates. The Fed hasn’t actually done anything yet, but it’s ability to influence the markets is so strong that they move in anticipation. This also means the market agrees with the notion that the Fed has no choice other than to increase rates quickly, and begin vacuuming up the money it printed over the last two years.

The risk now: the Fed increases rates quickly to tame inflation, and ends up triggering a recession, or economic contraction. This has happened in the past, so it’s not a theoretical risk, it is very real.

Markets are constantly trying to look around corners, and into the future. While there is no expectation for a recession in 2022, there is now a real risk of one beginning next year.

What does all of this mean for our portfolios? While none of this is what investors want to hear, it’s not all bad news, and it’s a challenge all long term investors face from time to time.

Bond prices have dropped, but if you are: dollar cost averaging, reinvesting dividends, or both, you will be purchasing shares of bond funds at lower prices, and the new bonds in these funds will be issued at higher yields, which is good news for you long term. The other good news is that when a recession does come, and the Fed cuts rates, bond prices will rise, causing bonds to act as good ballast in what will be a storm.

Stocks have been overpriced for some time. While we don’t like to see stocks fall, we do like to see healthy valuations that make sense. Getting back to that point is better in the long run. And again, with dollar cost averaging, and dividend reinvestment you’ll end up purchasing stocks at lower prices, something long term investors love to do.

Those of us who plan to hold stocks for the rest of our lives, and will continue to buy along the way, don’t mind these ebbs and flows of the market. They present opportunities to buy what we love on the cheap, which is really ownership of the world’s largest economy.

If you have been speculating in stocks, day trading, buying what’s popular, and getting into the “meme stock” trend, it’s probably time to reconsider those positions and activities. The best way to invest in stocks for the long run is to purchase diverse, high quality portfolios, such as the S&P 500, with a plan to hold them for a long time.

These storms will come and go during our investing lives, they shouldn’t surprise us. While the pandemic economy was unusual, we’re seeing an economy and market returning to long-term norms in terms of growth, and it’s time for the Fed’s strong medicine to be withdrawn.

Even if there is a recession in the coming year or so, we should be prepared to weather that storm, and continue to grow our portfolios over the long run.

 

 

 

Buoyant Financial, LLC is a registered investment adviser located in Charlotte, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. This note is for informational purposes only, and should not be construed as investment advice, or a recommendation to buy or sell securities.

 

09 Jun 2021

Strange Times: Where Do We Go from Here?

By glen

 

We’re at a fascinating crossroads in the world of investing, and in many ways, a truly unique place.  While the adage: “this time it’s different,” always gets burned by the markets, this time, we’ve never been here before.

The best news: we’re almost near the end of the pandemic.  The good news: the economy is screaming thanks to unprecedented monetary (the Fed) and fiscal (Congress) stimulus.  The strange news: things are really out of whack in the markets, and this has quickly become visible in everyday life.

Lumber and building costs have skyrocketed, some things are still hard to find in the grocery store, and there are plenty of job openings, yet a high unemployment rate.  There are also strange things like “meme stocks,” and skyrocketing crypto currencies nobody had heard of until three months ago.  Let’s peel back the onion a bit.

So Much Money

Eight TRILLION dollars is a lot of money, and that’s a rough estimate of what has been dropped on the US economy by the Fed and Congress since the pandemic started.

The US government has sent checks to individuals, boosted unemployment, and supported almost all businesses in a variety of ways.  The Fed has been printing money to the tune of an additional $120 BILLION every month.

While the pandemic raged, the nation attempted to keep everyone and everything flush with cash to minimize economic fallout, but this process set up some strange dynamics.

Inflation

As the economy recovers from the pandemic, shut downs, and lock downs, money is once again flooding into goods and services as life returns to a new normal, and pent-up spending plays out.  The economy is whipsawing from the tremendous drop in output we saw last year to something approaching pre-pandemic right now.  That wave has a tremendous amount of momentum.  Economists were aware this was happening, yet inflation still came in four times higher than predicted last month, raising many eyebrows.

We’re now seeing prices increase in everyday life, coupled with businesses raising wages and offering incentives to attract workers, which also stokes inflation.  What do the financial markets say about this?

The Bond Market

The bond market tends to be intelligent, the smartest money in the room.  The Fed’s message to the bond market has been: this wave of inflation is just a wave, and with the economy getting back to normal, inflation will return to long term averages soon.  The bond market has priced this in as the absolute truth, because it is the absolute truth.

If inflation gets out of hand, the Fed will increase rates quickly, and force inflation back to long term averages.  If you’re old enough to remember double digit mortgage rates from the 1980’s, you’ve seen the Fed do this in real time.

The risk: the Fed doesn’t react quickly enough, is forced to increase rates faster than anticipated, and chokes off the current expansion, possibly creating a recession.

The Stock Market

The stock market is “all in.”

In the world of “blue chip” stocks (think S&P 500 and Dow Jones Industrial Average), the market is behaving as if rates will stay low forever, and the current expansion will never end.  It’s overpriced by most historic measures, and more money is ending up here because it has no other place to go with bond yields so low.

Then we get to strange places like “meme stocks.”  The current example is AMC.  The price of AMC increased by around 400% in one month when nothing really changed in the business of movie theatres.  In the normal investing world this would have meant that AMC figured out some new technology, created a monopoly, or found tons of gold buried under a theatre.  We’ve seen examples of this blind speculation recently with GameStop and others.

We’re at one of those places that feels like the dot com bubble where everyone seems to be trading stocks online, and making a killing because everyone else is buying like mad too.  Remember companies like: Ask Jeeves, eXcite, and Geocities?

Other Strange Things

The crypto currency space is frightening, and this won’t end well.  It’s difficult enough to justify Bitcoin, but these other crypto currencies, spiking almost randomly, make very little sense.  Much like the AMC example, people are dumping their freshly printed money into crypto currencies. What is the long term purpose of these strange coins?  They pay no interest, offer no dividend, and have no real utility.

The list of strange things goes on with things like tokenized art (non-fungible tokens or NFT’s), and SPAC’s, which are “blank check” companies, I give you money, and then you tell me what I bought.

Wrapping It Up

We’ve never been here, but some of these things look oddly familiar, and it’s strange to have them in the same room at the same time.  Inflation may or may not take us back to the 80’s.  Stocks may or may not take us back to the dot com bubble of the 90’s.  Strange things may or may not take us back to Beanie Babies, and Cabbage Patch Kids.

But, we’ve never been in a place where humanity is coming out of a gut wrenching pandemic with so much money to spend, and not enough places to put it.  This will surely end badly for some.

If you’re a regular reader of these blogs, you already know the punch line.  A balanced, diversified portfolio will weather whatever comes as this unprecedented wave in the financial markets passes, and serve you well in the post pandemic new normal on the horizon.

Not as exciting as a Dogecoin, but just as cute, and you’ll sleep well at night.  Please let us know if we can help, we’re here to help answer your questions.

 

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request. 

 

19 Sep 2020

Stuck in the Middle with You: Clowns & Jokers

By glen

Thinking about this post, the Stealers Wheel classic kept coming to mind.  We seem to be at the natural half time of the COVID pandemic, medical experts have been consistent in that we’ll probably see a vaccine during the first several months of 2021, which means we’re currently stuck in the middle.  Stuck in the middle is also the story of US markets.  The bond market and Federal Reserve are priced for the absolute worst-case scenario, and the stock market is priced as if things couldn’t get any better.  Clowns to the left, jokers to the right, but none of this feels very funny.  

I often mention to clients that the bond market tends to reflect a smarter, longer term view, and the stock market is naturally more speculative and prone to craziness.  On September 16th, Fed chair Jerome Powell made it clear that rates would remain at zero until at least 2023, and the Fed was willing to watch inflation exceed it’s target.  They’re essentially saying things are so bad, we’re going to do everything we can to stimulate the economy until it overheats.    

This isn’t ambiguous, in the past they might have said something vague like: “until conditions change.”  The new language is very clear, and while open to criticism, nobody trades against the Fed because the Fed always wins.  They wield enough power to put the bond market where they want it, and keep it there for better or worse.  So, the bond market is in line, and has been in line.  To put this into perspective the 10-year US T-Bond is currently yielding around 0.63%, over the last 20 years the average has been closer to 3%.  People buy bonds to protect money, and that buying pushes yields downward.  After nearly 7 months in COVID world, the bond market remains priced for the end of the world.  These clowns are sad, but tend to be smart too.  

The stock market on the other hand is priced as if it were in some other magical world.  It seems to ignore that unemployment has only come down to where it was during the great recession of 2008.  It seems to ignore that overall economic output has been knocked back to 2018.  It seems to ignore that corporate earnings, while recovering, are nowhere near where they were in February, and are much harder to forecast given all the uncertainty we face. 

The value of stocks can be measured by the price to earnings ratio.  This simply looks at how much you’re paying for $1 of earnings.  Looking at the largest US corporations (S&P 500), investors are currently paying around $26 for $1 of earnings.  Last year, when the economy was solid, this number was around $23, and historically back to 1970 this number averages closer to $19.  What do these jokers know that the clowns don’t?  Nothing. 

There are many explanations as to why stocks prices have been driven up.  Some of this is Fed driven, when rates are at zero stocks are naturally worth more for reasons I won’t bore you with here.  Some of this is driven by mom and pop investors with too much free time on their hands, trying to get in on the action.  Some of this is driven by gamblers with a habit to feed, and a lack of sporting events (the sports betting market is measured in the hundreds of billions).  The jokers seem to be running wild.  

I’m stuck in the middle with you.  Historically, we know pandemics fade into history, and that the world is indeed not coming to an end, but the clowns are very depressed and scared.  Historically, we know stocks aren’t usually worth $26 for $1 of earnings even during the best of times, the jokers have lost their mind running with lady luck.  

The real answer will be somewhere in the middle.  Long before 2023, as inflation rises, the Fed will allow longer term rates to rise while keeping their promise of a zero overnight rate.  Stocks will find fair prices as earnings stabilize, and the realities of a long recession take a toll on corporate earnings.    

With clowns to the left of us, and jokers to the right, the only place to be is in a diversified portfolio of stocks and bonds reflecting your risk tolerance, and retirement goals.  

We’re happy to be stuck in the middle with you, please reach out if you have questions, or would like to talk about your financial plan and portfolios.  

Buoyant Financial, LLC is a registered investment adviser located in Huntersville, NC. Buoyant Financial may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. A copy of Buoyant Financial’s current written disclosure statement discussing Buoyant Financial’s business operations, services, and fees is available at the SEC’s investment adviser public information website – www.adviserinfo.sec.gov or from Buoyant Financial upon written request.