Jim, I'm getting confused. You keep making the point that stocks can't fight the bond market; that if bonds stay strong, the market has to go higher; that if bonds sell off, that could stop stocks, but that if rates stay down, we go back to 1120 (or higher). But then, earlier today (and on other occasions), you said that "if interest rates are not at lows, then the market can fall some more". You also said that a further fall in rates could trigger problems with derivatives and "all hell would break loose". I can't tell if you think lower rates would be good or bad for the market at this point.
I'm not sure you've thought this through (or perhaps you were typing to fast). I'd agree that, in a normal market/economic environment, lower rates are good for stocks (due to valuation formulae and stimulation of growth). However, when long but not short rates are dropping sharply (almost to the point of inverting the yield curve) while the economy seems to be going full guns (4.3% unemployment, strong GDP/income/spending/job growth); our major trading partners are shrinking faster than we are growing; our major corporations are lucky if they manage flat earnings; and our currency is going through the roof, further damaging our international companies, this can hardly be said to be a normal economic environment. It is times like these, especially when valuations are so high as to be "priced for perfection", that bonds and stocks can reasonably be expected to decouple. In fact, the seem to have done just that.
These are the "R" word whispers I keep talking about. Couple that with the valuations, the action of defensive stocks vs. the rest (especially transports, which BTW would be much lower if not for the collapse of oil prices), and the sharp spike in the most speculative of stocks (some actually think that the Internet stocks are immune to both market and economic downturn), and what you have is the making of a MAJOR top. These conditions are nothing like any that we have seen since this bull market began in 1982, so everyone seems to think this is impossible, that stocks just don't behave this way. They do.
You can't even compare this to 1987 - then, the economy was going strong, but inflation was a serious threat. So, the Fed did what they needed to do and raised rates. The market kept going because earnings kept going, but higher rates eventually slowed growth and at the same time changed the valuation math. The market finally reacted that October.
The market, or Mr. Market as Bill H. would say, knows all. It will know if a recession is coming well before any stats show evidence of it and even longer before most investors believe it. I think that this is what Mr. Market is telling us now.
JMO, BWDIK?
Regards,
Bob |
