Despite ourselves.
Even after a global market surge that virtually “wiped away” the four year bear market, equities still seem to be the best game in town. Corporate and individual investors are flocking back to a haven they had abandoned in favor of bonds when, in an era long ago, yields and credit rating offered them a secure place to park money.
For now, at least, low yields and discounted valuations have to be met with decisiveness, and that means speculation in the near-term prospects of stocks delivering a quality return that they cannot find in bonds.
Welcome to a bizarre world of forlorn choices.
To be sure, there is plenty of money on the sidelines just looking for opportunity of any kind. But when investors grudgingly have to be led by the nose back into the stock market, we hardly have the rallies that make legends…in spite of the new highs. Besides, many have come too late to the party, and others, still, see the economic fundamentals as a serious underpinning for a rally.
This rally is being achieved with mirrors. While the bad news might be drying up, there is a dearth of really good news to replace it. Call this a rally of suggestion, rather than choice.
Having said that, the averages do seem inexpensive despite their breakout. After all, price earnings ratios had contracted so much because of corporate layoffs and efficiencies. Any multiple in price performance would be simply squeezing water (value) out of a stone. Further, corporations are starting to see value in hiring and manufacturing, suggesting balance sheets might compress as spending expands.
More than any other group, however, the financial professionals (traders) on Wall Street have benefited from the rally while the “little-guy” sits, incredulous, on the sideline. You saw how trading bonuses on “The Street” have been going up, yes?
The single biggest reason for the rally, according to my statistics, is the pervasive decline in bond yields, and the evaporation of the alternative investment scenario. Clients seek return, and as long as the Fed, and other global treasuries, strive to keep inflation low, austerity high, and money cheap, investors must fill the void with something. In this case, hopefully not to our detriment, that “thing” is stocks.
But with low volume rallies moving the averages, it is clear that institutions are playing more than you or I. While fewer people are net sellers of stocks, it is also true that there are fewer net buyers of stocks, too!!
So, with an absence of selling, the bias is to the upside. Perhaps this is more of a “quant” thing than fundamentally-driven, but clients could care less, as long as they see gains in their monthly statement. As valuations go up, the appetite for stocks does also.
Hold on.
There is still fundamental and quantitative reason for concern. If the majority can move the market up on a whim they also control the velocity pedal on the way down. And if they sense an apex coming you can bet they’ll take their money and hide, at least in the short-run.
Bear in mind, we have come a long way, almost fifty percent, from the bottom. The rally has been a welcome diversion from the gloom of the past crises. Whether we can rest comfortably up here at the top is another thing, altogether. The issue is sustainability. Whether you choose to measure it as a function of confidence, fundamentals, valuation, or time remember that all events are cyclical.
I’m happy with our gains thus far this year. Maybe the thing to do is to park those gains and count our bounty…rather than counting the number of self-inflicted wounds we might incur.
Scotty C. George
(212) 624-1147
The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and it accuracy cannot be guaranteed. It is intended for private informational purposes only. Any opinions expressed are subject to change without notice. Du Pasquier Asset Management and its affiliated companies and/or individuals may from time to time own or have positions in the securities or contrary to the recommendation discussed herein.
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