Wednesday, February 1, 2012
This is puzzling at first glance.
Bond yields, as I have written repeatedly, are at 60 year lows. The 10 year US Treasury note, for example, is yielding 1.8% at this writing, and Treasury yields for maturities under 5 years are well south of 1%.
The only reason, in my opinion, that someone is buying bonds offering such paltry yields is a fairly sour view of the world, since today's bond rates will barely keep up with inflation. Yet, based on the strong demand for securities at recent Treasury auctions, there seems to be a fairly large contingent of investors with a pretty bearish outlook.
So why are stocks off to their best start since 1994?
The S&P 500 rose +4.4% in January despite an earnings season that has been fairly uninspiring. In fact, less than half of corporations that have reported earnings so far have beat expectations, which represents the poorest showing in several years.
Internationally, stocks rebounded sharply last month. Even China - whose economy still seems to be slowing - saw its stock market jump nearly +11% in January, according to Ned Davis Research.
So if you're a "risk off" strategist, you would point to the government bond markets around the world for confirmation of your cautious stance.
Or, if you're a "risk on" forecaster, you only have to look to the stock market action at the start of this year as evidence that your rosier outlook is correct.
I believe we have several basic themes going on in the markets right now.
First, the announcement that the Fed does not anticipate raising interest rates until at least 2014 means that returns from cash will be minimal at best.
Thus buying a bond with a low yield offers a better return than cash for bearish investors, while stocks trading at reasonable multiples and in some cases paying a dividend works for the less nervous group of investors.
Second, there seems to be a growing consensus that the crisis in the eurozone has been contained for now.
The European Central Bank has injected nearly 1 trillion euro into the banking system, and the Fed has intervened in the European money markets to meet demands for dollars. The large European banks may eventually meet an untimely end, but it probably will not be this year.
Finally, it was only a year ago that the emerging market nations like Brazil, China and South Korea were aggressively tightening credit to try to rein in the inflationary pressures in their economies.
These efforts were successful - as they often are the emerging markets - but now the governments are once again trying to stimulate domestic demand. If their efforts work, the emerging markets could rebound, taking their markets with them.
So it seems to me that the happy days that most investors experienced in January are largely the result of global central bank policies, lead by our own Ben Bernanke.
So a hearty "thank you" goes out to our Fed Chairman!