I often refer to the John Maynard Keynes quote “The market can stay irrational longer than you can stay solvent” as a way of qualifying why stocks do what they do. It helps explain how fear can overshadow fundamentals and your portfolio values could drop from one month to the next without justification. January, was not one of these irrational months.
The S&P 500 gained 1.90% and the Dow Jones Industrial finally ascended through the psychological 20,000 barrier.1 The Trump rally continued through the inauguration and seemed to inch higher with every new executive order that was signed. Although there is great concern for our country in social, economic, and political circles, fear does not seem to be present in investing circles.
Corporate earnings are still strong (overall) and from a fundamental perspective, I believe stocks are still fairly valued. In fact, I would say we are far from seeing fear’s counterpart, greed, take the market irrationally higher than fundamentals would justify.
Bonds and interest rates can behave irrationally also. Although the Barclay’s Aggregate Bond index was up 0.21% in January2, interest rates are still much higher since the election and the Fed is pointing toward more rate hikes this year. Some of Trump’s policies will surely have an influence on trade and if inflation stays relatively tame, we could see interest rates of longer maturities rise. Rates go up, bond values go down, so bond investors would appear to be in a predicament.
That is, unless interest rates don’t actually go up. The Fed has been loosening the grip they have on intermediate rates with the conclusion of all the QE programs, so their impact is somewhat limited to the short term bonds and CDs. New executive policies and economic improvements are the real threat to rising rates, but there is still one overwhelming concept that could keep rates low.
America has had its weak moments and still has trillions in debt, but I don’t think I will sound too biased when I proclaim America the greatest and most stable country on Earth. All things being equal, you would expect our government bonds to have relatively low rates compared with other developed countries that aren’t quite as stable. However, what we see today is that our Treasury bonds are higher than the Europe and Asia equivalents. You can bet our bonds will continue to be a very popular place for foreign investment for years to come. This alone will add immense pressure forcing rates to remain low.
It will take some time to see how the new administration policies and the economy will flesh out pushing interest rates up or down. For now, we will enjoy what the markets have provided and hope 2017 remains rational.
2Wall Street Journal
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