Profit Taking and Recovery

     Stocks continue to do well as investors continue to put some of their idle cash to work in stocks.  That is not a new story, nor for that matter is it one that is winding down.  Look for buying to increase and prices to move still higher for the same reason they've done well for a few years, i.e. there is no alternative.     

     Investors shrugged off May's profit-taking triggered by Bernanke's comments about Fed bond buying to which people overreacted.  The Fed must have been surprised by the quick sell-off in both stocks and bonds, because in appearances since May Bernanke and others made it clear that short-term rates won't be rising for years.  Recently he said that the 7.6 percent unemployment rate "overstates" the health of the economy and argues for more accommodation not less and low rates for a long time.  And he's right.  Look beneath the headline numbers for hiring (mostly part-time) and the picture is bleak.  The broadest measure of the labor picture shows that 14.3 percent are either out of work or in a part-time job when they really want to work full time. 

     Bonds have not fared well as stocks rallied.  Treasurys have been especially hard hit and with good reason since they had been the most overvalued.   

     What catalyst could drive stocks higher?  A slight rise in the market's price-earnings ratio would do it, that on top of a small boost in earnings estimates for next year that will be reflected in prices before year-end.  There is another factor.  Hedge funds and institutions have been underinvested in stocks for years.  There is $2.6 trillion in money-market funds, two-thirds held by institutions.  The cash-heavy professionals are returning, though slowly.  Individuals control one-third of the money-market trillions.  Some are re-discovering stocks as well.  Buying by pros and amateurs will support the market when profit-taking occurs and propel it higher at a rate faster than earnings growth would dictate.  Presto!  Multiple expansion.

     Bottom line: As long as alternative investments remain unattractive (think years), stocks will do well.  They'll do best if GDP growth here and overseas picks up even if that makes interest rates rise, because profits would be rising, too.  That, plus some multiple expansion, is what many investors are banking on.  They'll be right.

David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security. 

Blame Bernanke?

The selling of stocks and bonds in recent weeks was reaction to Ben Bernanke's saying what we all knew -- the Fed can't buy bonds and mortgages at this rate ($85 billion/month) forever, and sooner or later it will buy fewer until it buys none.  

All the selling because of Bernanke?  Not so fast.  While Bernanke's comments are a convenient explanation for the market's sell-off, the truth lies elsewhere.  Prior to the recent selling the S&P 500 was up 17 percent year-to-date and long overdue for some profit-taking (6 percent).  Profit-taking can be triggered by many things...or by nothing at all.  It just happens.  Invariably, the media and market observers point a catalyst.  In this case, it was Ben Bernanke and his timetable to end QE if this and that happens.  

The Fed will slow down its purchases when the economy is in better shape, inflation rises and the employment picture improves.  Bernanke said so...again.  But the Fed is ready to buy even more bonds if the economy loses steam or inflation stays far below its 2 percent target.  He said that, too.  Bernanke went on to add that if economic forecasts prove correct (a huge "if"), bond purchases might end by mid-year 2014 and a boost in the short-term rate might occur a year later, assuming the economy stays on a growth track.  That timetable was new.  Don't count on it.  Policy will depend on future economic data; a lot can happen along the way.  

While many investors are jumping to the money market, they won't be content there for long.  The need for income will trump all else and investors will continue to focus on better-yielding stocks, which won't give much ground.  Should investors sell a stock that yields 3.5 or 4.5 percent to hold cash that pays nothing?  If its dividend would be cut, yes.  If long-term interest rates will soar and the stock's yield would no longer be attractive, probably.  But long-term interest rates won't soar without a sharp rise in inflation.  Commodity prices are in a free fall and there is no pressure on labor costs.  Forget inflation.  

I expect bond yields will rise to normalized levels.  That isn't far from here.  Once there bonds won't offer serious competition for quality stocks with good yields.  That will become clear soon enough.


— David Vomund is an Incline Village-based fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security. 
 

Top ETFs for Your Retirement

Here is a brief interview with Main Street, a division of The Street.com:

http://www.mainstreet.com/article/retirement/top-etfs-your-retirement-savings

David Vomund