To many observers, stocks’ year-to-date gains are a huge puzzle. Photo by Sion Touhig/Getty Images.
RIP Bouncy Times. January 15, 2014 – May 20, 2014. You fascinated and frustrated a flock of financial pundits who sought meaning in your sideways bobbing. We’ll not soon forget you. But, evidently, we will replace you. Yes, our illustrious financial press has a new obsession: searching for meaning in … err … uppy times. World stocks are up about 4% since bouncy times ended.[i] They’ve set a dozen new highs along the way and reached some other arbitrary milestones. Pundits have worked themselves into a lather trying to explain why and what it all means, and the general consensus is these gains are phony baloney, which implies droopy (?) times are ahead.[ii] Our take? It’s all noise. With few recognizing the bull market’s strength and most looking for a meltdown, stocks should have plenty more gains in store.
We don’t fault the media for their never-ending quest for meaning in volatility. It’s their job. With few exceptions, these are reporters, not analysts, and their job is to report market movement. “Stocks go up” doesn’t take up much space, so they backfill with fun factoids, guesses and quotes about why stocks did what they did and what it means looking forward. And competition for readers is fierce, so the sensationalism seems to reach levels not seen since the USS Maine exploded. One outlet proclaims stocks are on the verge of six straight positive quarters—for the first time since 1998!! Another heralds the simultaneous rise in stocks, bonds and commodities (oh my!)—the first since 1993!!! And it’s all because of (allegedly foolish) stock buybacks! No, wait, weather! No, wait, falling Treasury yields! No, wait, irrationally euphoric complacency!
And you thought cable TV and the Internet were supposed to reduce static.[iii]
At the risk of sounding like dismissive Pollyannas, here is the simple truth: None of it means anything. Stocks, bonds, gold and other commodities all moving in the same direction? Just an interesting observation about recent past prices. It doesn’t mean stock investors are ignoring risk while others flock to the supposed safety of bonds and inflation hedge of gold and whatever of coffee and pork bellies.[iv] Or that the quest for yield rivals the quest for the Holy Grail.[v] It just means markets are being markets. Each category is moving according to its own supply and demand drivers and sentiment swings. Sometimes volatility is just volatility, variability is variability and the lack of either (or both!) the same randomness. No need to overthink it.
Pundits do near-universally agree on one thing: They’re surprised stocks are up this much year-to-date. Through Friday’s close, the MSCI World Index was up 6% for the year.[vi] The S&P 500 was up 7.2%.[vii] Mid-single digits, about where most pundits expected full-year returns to end up. To most observers, it’s a head-scratcher—stocks shouldn’t be up this much on the heels of a strong 2013. Especially as some economic data wobble and bullets fly in Ukraine and Iraq.
The BIS—the consortium of global central banks—released its explanation for this “puzzling disconnect” on Sunday: themselves. Ok, that’s a touch oversimplified. What they actually said is that low rates have made financial markets “euphoric, in the grip of an aggressive search for yield,” but the debt-driven economic growth model has reached its limits. Companies can get funding, but they aren’t investing in anything to boost productivity and output—just buying back shares, driving stock prices and earnings artificially higher.[viii]
Frankly, we don’t know where they’re getting this. Yes, stocks are up while some parts of the world look weak, but when is that not the case during a bull market? Yes, buybacks are up (good, not bad), but so is business investment. Fixed investment—which doesn’t include buybacks—was at an all-time high in the US before Q1’s (weather-related) GDP contraction (and some components, like R&D, rose in Q1). UK business investment is up five straight quarters. Seems to us businesses are spending in a pretty darned growthy way. As for euphoria, as a general rule, you don’t see the majority of pundits questioning the validity of market gains when euphoria reigns. They’re too busy rationalizing away or ignoring any possible sign of weakness. Not the case today.
To us, stocks’ gains make sense: Corporate earnings are up. The world is growing. Leading Economic Indexes say it’ll keep growing. The political backdrop is favorable. And few see any of this—expectations remain behind reality. (In our view, you learn as much observing the searchers as they are likely to searching.) That’s it! Doesn’t have to be any more complex than that!
As for what comes next, we think there is plenty more bull market in store. A correction is possible—always is—but you can’t game that or time it. Nor should long-term growth investors wait for one to occur before putting idle cash to work—too much potential opportunity cost. Besides, corrections are short. Regardless of what stocks might do over any short period, in our view, there is too much driving this bull market forward for it to end now.
[i] Soure: FactSet, MSCI World Index returns including net dividends, 05/20/2014 – 06/27/2014. Yes, the start and end of bouncy times are dates we selected. We invented the term, so this is our prerogative.
[iii] Really. We haven’t seen this much static since that time we tried (and failed) to get a clear signal of Max Headroom by adjusting the rabbit ears on our 13” faux wood-paneled Zenith.
[iv] So there is no confusion: It is sheer myth that bonds are safe or gold an inflation hedge. US Treasurys have the lowest default risk on the planet, but their prices swing up and down as interest rates move. As for gold, it’s a shiny glittery metal. Not an inflation hedge, not a store of value. If either were true, we’re pretty sure it wouldn’t have had a two-plus year bear market from 2011. Or plunged in 2008. Or lagged CPI for most of the 80s and 90s.
[vi] FactSet, as of 6/30/2014. MSCI World Index returns including net dividends, 12/31/2013-6/27/2014. (What, you thought we’d put a joke here?)
[vii] FactSet, as of 6/30/2014. S&P 500 Total Return Index, 12/31/2013-6/27/2014.
[viii] Their argument, not ours—buybacks aren’t fakery or earnings jiggery pokery. They’re just another way to return cash to shareholders, and they happen to reduce share supply. That’s fundamentally good, not bad.