Uncertain Fed Plus Uncertain Economy Equals Uncertain Markets
Stocks, Bonds, and Gold Oh My!
After 111 calendar days we have established one thing about the 2014 investment landscape; it is quite a bit different than 2013. The "easy" call heading into 2014 was that bonds were going to fall in price and interest rates were going to rise. Unfortunately, there are no easy calls in the world of investing. From Bloomberg:
The surprising resilience of Treasuries has investors re-calibrating forecasts for higher borrowing costs as lackluster job growth and emerging-market turmoil push yields toward 2014 lows. That's also made the business of trading bonds, once more predictable for dealers when the Fed was buying trillions of dollars of debt to spur the economy, less profitable as new rules limit the risks they can take with their own money. "You have an uncertain Fed, an uncertain direction of the economy and you've got rates moving," Mark MacQueen, a partner at Sage Advisory Services Ltd., which oversees $10 billion, said by telephone from Austin, Texas. In the past, "calling the direction of the market and what you should be doing in it was a lot easier than it is today, particularly for the dealers."
On a relative basis, long-term Treasuries (TLT) shot out of the starting gate in 2014. Since then, there has been no clear leadership from bonds or stocks. Early in trading Tuesday, TLT was besting SPY by 0.53%.
Earnings Push Stocks
Markets often pause when investors begin to question stock valuations. At some point corporate earnings must justify higher stock prices. Stocks have been in pause mode for most of 2014. Earnings are trying to push the play button once again. From Bloomberg:
"The few earnings that we've had so far have been coming in pretty well," John Fox, director of research at Fenimore Asset Management in Cobleskill, New York, said in a phone interview. "All the fundamentals still line up that stock prices can go higher. Interest rates are still low, the economy's getting better. All of that is still a good environment for equities."
This week's stock market video covers numerous short-term hurdles that, if crossed, may allow stocks to take back the upper hand relative to bonds. Earnings will most likely determine the outcome.
All That Glitters
Investor confusion has not been limited to the stock and bond markets. With tensions between Russia and Ukraine escalating early in the year, gold (GLD) appeared to be emerging as a market leader. The last month has not been kind to gold investors, putting them in a similar and still unsettled boat with stock and bond investors.
Professional money managers have been net-sellers of the yellow metal in recent weeks. From Bloomberg:
Hedge funds lowered bullish bets on gold for a fourth week, the longest streak this year. The net-long position contracted to the lowest since mid-February as speculators sold bullion on signs of accelerating U.S. economic growth. The investors more than doubled bets on lower prices in the past month while reducing wagers on a rally in six of the past seven weeks. Prices fell 7.6 percent since reaching a six-month high in March after tension in Ukraine eased and U.S. equities rallied to a record.
Investment Implications - Tying To End Yo-Yo Action
Monday's session followed through on the gains posted in stocks last week, which is a good sign since it may be signaling the end of the market's yo-yo action. We added to the growth side of our portfolios based on the observable improvement in the market's tolerance for risk. Some of the concerns that were present at Friday's close were cleared Monday. We still prefer to see the Dow make a new high above 16,576; it closed Monday at 16,448. We continue to hold a mix of stocks (SPY), bonds (TLT), and cash. While the markets would like to see some resolution in Ukraine, that appears to be little more than wishful thinking at this point. From Reuters:
An agreement reached last week to avert wider conflict in Ukraine was faltering as the new week began, with pro-Moscow separatist gunmen showing no sign of surrendering government buildings they have seized. Washington says it will hold Moscow responsible and impose new economic sanctions if the separatists do not clear out of government buildings they have occupied across swathes of eastern Ukraine over the past two weeks.