Well, for one thing, the price is up. Conversely, the yield is down. As of 9:30 PM CDT, 5/8/14 the yield stood at 2.61%, down from 3% at the end of 2013. This, according to the media wonks and pundits, was not supposed to happen. Rates were supposed to go up as people fled the safety of bonds on the tapering of Quantitative Easing (QE). I mean QE was why rates had gotten so low, right? Not so fast, it may be just as much about fear… the fear of a double-dip recession two years ago, Europe imploding, a Chinese bust and geopolitical concerns (Session 53–“Hyper Low Interest Rates: Was it QE or just plain fear?”). And, now of course, the ever-present fears; we have gone too far, too fast, the economy is weaker than we imagined and that we have created another bubble on the verge of bursting. Recent market action correcting the bubblet (a mini-bubble) in tech, social media, biotech and a score of momentum plays, has reinforced this fear. Although the precipitous drops in some of these names are very scary, it is important to note that it is not the whole market being kicked to the curb, just a small (and maybe deserving) subset.
The Dow Jones Industrial and S & P 500 continue near record highs
This fact also scares a lot of people who watched the meteoric rise off the lows of 2009. And, many think this, too, will end badly (a crushing bear market). I might point out to the fearful that the first time the S & P 500 approached the 1550 level was in March of 2000. It briefly broke through that level closing at 1565.15 , October 9, 2007. In 2013 it finally broke out to new all-time highs in the 1885 area. We closed on May 9th at 1875, up 325 points in 14 years (compounding, ex-dividends at a whopping 1.37%). What may to some look like a bubble off the bottom in ’09, looks to me like severe/ below-trend-line performance in the last 14 years. Oh yes, the index PE is 40% below the March 2000 peak and the dividend yield has almost doubled vs. a ten-year yield that has more than halved.
The Media piles on the fear fest
Here are a few examples from yesterday (5/8/2014):
1) From our friends at Fox Business Channel and that legendary, groundbreaking broadcaster, Maria Bartiromo (A.K.A “The Money Honey”), we give you an interview with one-shot-wonder, Nouriel Roubini–“We are at the very beginning of a great bubble.” Roubini called for a market collapse several years before the 2008 blow-up, but never got positive as we moved out of the crisis.
2) From MarketWatch Paul Farrell presented us with this headline–“Ten peaking mega-bubbles signal impending stock market crash,”which for a large part of yesterday was the #1 most popular story sourced on their website. It remains in the top 5 today. This shows you where people’s heads are.
3) Finally, from CNBC, perma-bear, Marc Faber, provided this: “I’m worried about a crisis bigger than 2008.“
You never see the bubble that takes you down
Ergo, all of the above may not be helpful guides to the next big disaster. Rest assured there will be a next big disaster. There always is. I would temper this by saying 2008 and 1929 were financial panics and panics like this are few and far between. Bear markets will happen and they will be scary, but they won’t be near-death experiences such as we just went through.
On a lighter note
Mark Hulbert in MarketWatch (May 7, 2014) gives us a ray of hope–-“Investors get bearish, suggesting stocks will rise. ” Hulbert contends that contrarian analysis of sentiment would suggest an upturn might be eminent.”
In the final analysis the strong 10-year points me to the idea that a healthy fear and skepticism exists in the market and that is a good thing.
What do you think?
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