Low bond yields take us back to a bull market
It’s hard to describe such a tumultuous year: an increasingly unresolved pandemic, growing unemployment, extreme market volatility (in both directions), with no end in sight. The stock market says clear-skies and no worries, with a climb-back of 45.5% in the SP500 from the March 2020 low, -2% year-to-date. This for sure doesn’t tell us the whole story. The rosy picture in stocks is only balanced by what’s happening in the bond market, a force significantly larger in value and trading volume than stocks.
Bonds are the world’s largest financial instrument. Governments offer security by guaranteeing their debt and selling them for income to investors and other governments. To stimulate the economy and keep the world from accelerating down a dark, deflationary path, central banks have been buying up their own debt at an unprecedented rate. This was the case in 2008, as “Quantitative Easing” was introduced, but it pales in comparison with what’s happening now as this force has pushed the 10-year U.S. Treasury rate to .64%. With so much demand in bonds, interest rates are pushed to extreme lows, leaving investors with few options for where they can put their money. The stock rally is less about market fundamentals and far more as a reaction to bonds, where no profitable options exist. In fact, every high-grade bond that I've found if purchased with a short maturity guarantees a loss.
Stocks have been trending higher since 2009-low, at a record-stable pace, raising the SP500 by 373%. This year was thought to be the first change to this trend, however, Friday suggests that the market has returned to its long-run continued bull-run as it has re-entered its decade-long channel. (see chart).
Not all stocks are the same as the most negatively impacted includes energy (oil & gas) and financials (since banks aren’t receiving mortgage payments). The Nasdaq technology index “QQQ,” is up 23% for the year and includes the big social media names, Microsoft & Apple, which are acting like financial safe-havens for investors.
With the US recovery lagging behind Europe and China, there may be added stress on the US dollar, as investors look elsewhere. To help offset this risk in your portfolio, adding international stocks might help reduce losses from a dropping dollar if you’re a US investor.
At Eureka Wealth Management, I’ll help you through this trying time by keeping you informed of your investing options and help you navigate to and into retirement. I also offer insurance, tax & estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.