Is the Weather Changing in the Stock and Bond Markets?
Up, up and away! How else can you describe the stock market as it continues to grind higher and higher. And this despite all the warnings and hand-wringing coming from so many month after month. So far, no correction, never mind crash.
Then there's the bond market. There we've been subjected to not only months, but years and years of chatter about the inevitable fate of bond yields: again up, up and away, which, of course, means the value of any bonds we hold will sink. But, as with stocks, in the case of bonds the warnings have been off the mark. Each time rising yields appear to gain traction, around they turn. And while yields haven't set all-time lows, as stock averages have set all time highs, they've definitely not broken out into the stratosphere as we've been incessantly warned.
With this in mind, the recent change in the weather here in the Northeast got me thinking about weather and the markets. After a stretch of temperatures below average, lots of rain, cloudy days even when it didn't rain, we're now in a heat wave. From averages in the low to upper 60s, we're in the 90s. Humid too. But while I may not care for heat waves, I'm never surprised by them - at least not when they come anytime between April and October. I've seen it all before.
There's something here to compare to the action of markets.
First of all, prices of all markets do follow trends: primary and secondary. Primary trends compare to seasons. For example, in the Northeast we know temperatures will generally vary between warm to hot once summer arrives. That doesn't mean every day will be 90+ (thank goodness!). But generally the norm will be warm temperatures with occasional heat waves.
Compare now to stocks. The primary trend is up: It's a bull market (duh!). So prices will hover high, with occasional spikes. In the case of market prices, when the primary trend is "bull," prices will not simply spike, but more likely will spike higher and then higher again. But like the heat waves of summer, there's a interim return to some lower level at some point. That return doesn't' signal a change in the primary trend, just a kind of rest.
So it seems we're still in summer in the stock market. But note that, as opposed to our four seasons in the Northeast, there's no standard span of time for our stock market "summer/bull." On the other hand, even though we don't know when summer will end, we know it will. Fall and winter will eventually follow - in their own time.
The fact that a "seasonal" change will happen - someday - and the lack of a standard length of time for this "summer/bull" trend likely accounts to some degree for the constant bearish warnings and hand-wringing. You know fall is coming. Why isn't it here yet? Usually it would be. It should be...and so on. All of this logical thinking causes many of us to get ahead of ourselves in our predictions of an impending bear market. It's a case where applying logic to markets doesn't work all that well.
Oh, if market trends only followed the same pattern as the seasons! Our investment decisions would be so much easier, wouldn't they? Or at least they'd make more sense! We'd know the fall will be here soon, bringing a change. But, alas, we must remind ourselves that, while they do follow a pattern, while we do get "seasons" of bulls and bears, the length of each can vary, sometimes dramatically.
Indeed, when we begin to think this through, it turns out that it all does make sense, in its own unique way. It makes sense because experience tells us that's how it's always been.
And so we see that sometimes, in order to make sense of markets, we need to use both our logic and our experience (the history of markets). If we do that, what might we conclude from recent market action in stocks and bonds?
Simply that we're in a the midst of a long, long bull market season for both stocks and bonds. The stock bull began in 2009. Nothing indicates its over. Nothing definitive tells us how long it may go on. As for the bond bull, which we haven't much about talked today, it started in 1980 - now going on 37 years. Talk about a long, hot summer!
Finally, and not to complicate matters too much, there's something else we should keep in mind. The fact that there's no clear signal that these bulls are slowing down their historic rampage doesn't necessarily mean this "heat wave" will never end. As some of you probably know, in the midst of an especially long, brutal, extended heat wave, it does indeed feel like it will never end. That's just the way our emotions carry us. And during those summers sprinkled with many such heat waves (they do happen in certain years), we may even feel that summer will never end.
But, of course, our logic tells us that fall will come. And so it does, even if in some years it comes later. And so it will happen with our "summer/bulls" in stocks and bonds.
If you know when, please give us a shout. We'd love to know.
Then there's the bond market. There we've been subjected to not only months, but years and years of chatter about the inevitable fate of bond yields: again up, up and away, which, of course, means the value of any bonds we hold will sink. But, as with stocks, in the case of bonds the warnings have been off the mark. Each time rising yields appear to gain traction, around they turn. And while yields haven't set all-time lows, as stock averages have set all time highs, they've definitely not broken out into the stratosphere as we've been incessantly warned.
With this in mind, the recent change in the weather here in the Northeast got me thinking about weather and the markets. After a stretch of temperatures below average, lots of rain, cloudy days even when it didn't rain, we're now in a heat wave. From averages in the low to upper 60s, we're in the 90s. Humid too. But while I may not care for heat waves, I'm never surprised by them - at least not when they come anytime between April and October. I've seen it all before.
There's something here to compare to the action of markets.
First of all, prices of all markets do follow trends: primary and secondary. Primary trends compare to seasons. For example, in the Northeast we know temperatures will generally vary between warm to hot once summer arrives. That doesn't mean every day will be 90+ (thank goodness!). But generally the norm will be warm temperatures with occasional heat waves.
Compare now to stocks. The primary trend is up: It's a bull market (duh!). So prices will hover high, with occasional spikes. In the case of market prices, when the primary trend is "bull," prices will not simply spike, but more likely will spike higher and then higher again. But like the heat waves of summer, there's a interim return to some lower level at some point. That return doesn't' signal a change in the primary trend, just a kind of rest.
So it seems we're still in summer in the stock market. But note that, as opposed to our four seasons in the Northeast, there's no standard span of time for our stock market "summer/bull." On the other hand, even though we don't know when summer will end, we know it will. Fall and winter will eventually follow - in their own time.
The fact that a "seasonal" change will happen - someday - and the lack of a standard length of time for this "summer/bull" trend likely accounts to some degree for the constant bearish warnings and hand-wringing. You know fall is coming. Why isn't it here yet? Usually it would be. It should be...and so on. All of this logical thinking causes many of us to get ahead of ourselves in our predictions of an impending bear market. It's a case where applying logic to markets doesn't work all that well.
Oh, if market trends only followed the same pattern as the seasons! Our investment decisions would be so much easier, wouldn't they? Or at least they'd make more sense! We'd know the fall will be here soon, bringing a change. But, alas, we must remind ourselves that, while they do follow a pattern, while we do get "seasons" of bulls and bears, the length of each can vary, sometimes dramatically.
Indeed, when we begin to think this through, it turns out that it all does make sense, in its own unique way. It makes sense because experience tells us that's how it's always been.
And so we see that sometimes, in order to make sense of markets, we need to use both our logic and our experience (the history of markets). If we do that, what might we conclude from recent market action in stocks and bonds?
Simply that we're in a the midst of a long, long bull market season for both stocks and bonds. The stock bull began in 2009. Nothing indicates its over. Nothing definitive tells us how long it may go on. As for the bond bull, which we haven't much about talked today, it started in 1980 - now going on 37 years. Talk about a long, hot summer!
Finally, and not to complicate matters too much, there's something else we should keep in mind. The fact that there's no clear signal that these bulls are slowing down their historic rampage doesn't necessarily mean this "heat wave" will never end. As some of you probably know, in the midst of an especially long, brutal, extended heat wave, it does indeed feel like it will never end. That's just the way our emotions carry us. And during those summers sprinkled with many such heat waves (they do happen in certain years), we may even feel that summer will never end.
But, of course, our logic tells us that fall will come. And so it does, even if in some years it comes later. And so it will happen with our "summer/bulls" in stocks and bonds.
If you know when, please give us a shout. We'd love to know.
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