January 19, 2020

Is the party over?

On the heels of a nervous pre-holiday week, we saw a strong sell-off in the markets last Friday, leaving many to wonder if we've seen the highs for the year.  In fact, some investors are beginning to wonder if the bull market that has doubled the value of the S+P 500 since March of 2009 is finally coming to an end.  While the economic news is, on balance, improving, some disappointing news releases coupled with stronger sentiment that the Fed will start “tapering” their massive bond buying program in the not-too-distant future have created a much more volatile investment climate.

After attending the Economic Club Of New York luncheon honoring Paul Volcker last week I remain firm in my conviction that low rates are going to be part of our investment calculus for a long time. In other words, we are in an era where stocks (and to a lesser extent, high income investments) will remain the only game in town not for months, but for years. Consequently, any market sell-offs should not be construed as the turning point that investors are shifting out of stocks and into bonds. Rather, investors are taking large profits and sitting in cash until they realize that there is no substitute for stocks.

Volcker noted that the history of economic deleveraging teaches us that rates can stay low (between 0% and 2%) for years. In the case of post-WWII America, rates hovered in a low range for 15 years!  Lengthy periods of economic repair are necessary following big bubbles. These periods are almost always characterized by low rates and years of rising stock markets.

A good test of any investor is the ability to understand lessons from history and to apply them, hopefully proactively, before the tide shifts. In the case of the recent market action, it is clear to me that what we have been seeing these past two weeks is not a shift in fundamentals but something much more indicative of short-term trading.