January 21, 2018 Bueller

Risk/Reward Vol. 377
 
THIS IS NOT INVESTMENT OR TAX ADVICE.  IT IS A PERSONAL REFLECTION ON INVESTING.  RELY ON NOTHING STATED HEREIN.

After nearly a month's hiatus, I am back.  Like a broken record, the TINA effect (There Is No Alternative--to stocks) continues in full force.  Indeed, the only change is its intensity.  Dow 25,000 was reached in record time only to be eclipsed by Dow 26,000.  Nothing seems to stand in Mr. Market's way, not even a government shutdown.  Will it continue?  That is the question debated almost daily in the financial press.  The most compelling argument for higher prices is the consensus opinion that the President's tax reform legislation should equate to a 14% increase in corporate profits.  That should mean a jump of 14% in stock prices, yet the indices are up only 5% since its passage.  So does that mean at least another 10% increase?  Why not?  What is the most compelling argument that a correction is near?   Let's hear from financial analyst Ferris Bueller.  Bueller?  Bueller?  Bueller?  Well if Bueller is silient, how about some advice from the utterer of that famous line, Ben Stein.  For more than a decade he has advised buying the indices.  And boy has he been proven right. 

One voice in the wilderness is Martin Feldstein, a noted economist and Wall Street Journal contributor.  He sees the rise of interest rates as the biggest threat to stocks.  And indeed, the yield on the all important US Ten Year Treasury is now comfortably above 2.6% for the first time since 2014 and is experiencing upward pressure from a variety of forces.  These forces include the reduction in the Fed's balance sheet, the ECB's decision to reduce its quantitative easing, China's threat to exit US bond buying and lastly,  the meteoric rise in the yield on the US Two Year Bond, now over 2% for the first time since 2008!  These increases in the yields on the 10Year and 2Year are impressive from a percentage point of view, but are a long way from what traditionally has been viewed as "normal".  Moreover, the amount of central bank intervention in the bond markets is still huge and its unwinding will take years.  I just don't see yields adversely impacting equities now or in the intermediate future. 

In sum, I say enjoy the ride.  It will last until it ends.  When is that?  I don't see anything on the horizon to suggest a correction.  That said, now is the time to devise your exit strategy even if you do not deploy it for months or even years.