Dow Blows Through 23,000: What's Really Going On in Markets
The Dow blew through 23,000 yesterday. For some, it was the inevitable next level of the current bull market in stocks. But with so many assets climbing higher and higher, we wonder: What's really going on in markets? Let's start with the stock market.
The two camps out there consist of those who think stocks are highly overvalued and those who see recent stock market action as indicative of a resurgent economy. One contingent of the former have been warning of a coming big correction if not crash for many months, if not years. But the warnings picked up in intensity over the last few months, and include quite mainstream sources. While their arguments can be persuasive (valuations being at extreme levels using almost any metrics), no correction of any kind has materialized. The latter somewhat convincingly point to various data that indicates a quickening of economic activity not only in the U.S., but virtually everywhere around the globe. They claim the stock markets higher highs are telling us that a kind of virtuous circle of international economic strength has combined to finally - finally - spark the sort of strong, consistent growth that has eluded economies since the crisis of 2007-2009. Lately, they've noted accelerating inflation numbers in various countries to accentuate their claim.
What about gold?
After a stunning bull market rise of ten straight years, gold corrected beginning in 2011 after hitting an all-time high over $1,900 per ounce. Some say that correction has ended. After descending to around $1,050 (an almost 50% drop), gold has bounced above and below $1,300 over the last few months. The 50% correction - which extended over 5 years, roughly half the time of the bull market uptrend, represents a normal correction in a strong bull market. The long, laborious bounce back - soon to enter its third year - has, however left some wondering whether it was really a correction in an ongoing, and now resuming, bull market or a correction in a long-term bear market that began in 2011. We have no particular evidence that tells us convincingly whether one side or the other is correct, although if we had to commit one way or the other, it seems more likely that the bull has resumed, albeit in just about as subtle a fashion as one might conceive so as to deceive the greatest number of people.
Now let's move to bonds.
The great bond bull market that began in the early 1980s has either ended or still has legs. The argument that it's either ended or in the process of ending has been heard since the early part of the century. Every year since 2000, we've heard that this year is it. So far, all we've seen is a continuation of the bullish trend. However, interest rate swings of the 30-year bond in the last few years have punctuated the argument that its obviously time to dump long bonds once and for all. And yet each time they spike, causing the first inklings of that panicky feeling that will one day likely finally take hold, they turn right around. (Remember: When interest rates rise, the value of bonds falls.) But has any definitive pattern asserted itself, such that we can conclude that bond bull has really expired. Two simple charts might lend a hand here.
This two-year chart of 30-year treasury yields looks like yields, after spiking up end of 2016, have been pretty much consistently heading lower - thus bond prices consistently (albeit modestly) have gone up in 2017.
But maybe that's too short a view. What do yields look like if we expand that? Here's a five-year chart:
So over on the right is that descending channel for 2017. But doesn't it look like, despite sharp bounces up, yields keep wanting to fall again? Does that look like a strong trend up - or down?
Of course, beauty being in the eye of the beholder, we could keep expanding the timeline and possibly make a counter argument. But instead of that, how about we just settle on focusing on the low of 2016: That was the low (2.10%) for this long-term trend in downward yields for the 30-year treasury. If we stay above that in the coming months, maybe we're slowly but surely going to see the long bond bull market finally - really this time - end.
So where does this leave us? Well, given the fact that today's upward lunge in the Dow wasn't matched by the S&P or the NASDAQ, we're where we were when we started this discussion: puzzled, wondering, holding our positions such as they are.
One thing we can count on: Wall Street will continue to tout stocks as the way to go for the long run. If there's any kind of correction, then they'll tout "buying the dips." And if there's - heaven forbid - an actual bear market, we'll all hear how we should just hang on to our positions until a new bull market starts again. That "advice," we suspect, will never change.
The two camps out there consist of those who think stocks are highly overvalued and those who see recent stock market action as indicative of a resurgent economy. One contingent of the former have been warning of a coming big correction if not crash for many months, if not years. But the warnings picked up in intensity over the last few months, and include quite mainstream sources. While their arguments can be persuasive (valuations being at extreme levels using almost any metrics), no correction of any kind has materialized. The latter somewhat convincingly point to various data that indicates a quickening of economic activity not only in the U.S., but virtually everywhere around the globe. They claim the stock markets higher highs are telling us that a kind of virtuous circle of international economic strength has combined to finally - finally - spark the sort of strong, consistent growth that has eluded economies since the crisis of 2007-2009. Lately, they've noted accelerating inflation numbers in various countries to accentuate their claim.
What about gold?
After a stunning bull market rise of ten straight years, gold corrected beginning in 2011 after hitting an all-time high over $1,900 per ounce. Some say that correction has ended. After descending to around $1,050 (an almost 50% drop), gold has bounced above and below $1,300 over the last few months. The 50% correction - which extended over 5 years, roughly half the time of the bull market uptrend, represents a normal correction in a strong bull market. The long, laborious bounce back - soon to enter its third year - has, however left some wondering whether it was really a correction in an ongoing, and now resuming, bull market or a correction in a long-term bear market that began in 2011. We have no particular evidence that tells us convincingly whether one side or the other is correct, although if we had to commit one way or the other, it seems more likely that the bull has resumed, albeit in just about as subtle a fashion as one might conceive so as to deceive the greatest number of people.
Now let's move to bonds.
The great bond bull market that began in the early 1980s has either ended or still has legs. The argument that it's either ended or in the process of ending has been heard since the early part of the century. Every year since 2000, we've heard that this year is it. So far, all we've seen is a continuation of the bullish trend. However, interest rate swings of the 30-year bond in the last few years have punctuated the argument that its obviously time to dump long bonds once and for all. And yet each time they spike, causing the first inklings of that panicky feeling that will one day likely finally take hold, they turn right around. (Remember: When interest rates rise, the value of bonds falls.) But has any definitive pattern asserted itself, such that we can conclude that bond bull has really expired. Two simple charts might lend a hand here.
This two-year chart of 30-year treasury yields looks like yields, after spiking up end of 2016, have been pretty much consistently heading lower - thus bond prices consistently (albeit modestly) have gone up in 2017.
But maybe that's too short a view. What do yields look like if we expand that? Here's a five-year chart:
So over on the right is that descending channel for 2017. But doesn't it look like, despite sharp bounces up, yields keep wanting to fall again? Does that look like a strong trend up - or down?
Of course, beauty being in the eye of the beholder, we could keep expanding the timeline and possibly make a counter argument. But instead of that, how about we just settle on focusing on the low of 2016: That was the low (2.10%) for this long-term trend in downward yields for the 30-year treasury. If we stay above that in the coming months, maybe we're slowly but surely going to see the long bond bull market finally - really this time - end.
So where does this leave us? Well, given the fact that today's upward lunge in the Dow wasn't matched by the S&P or the NASDAQ, we're where we were when we started this discussion: puzzled, wondering, holding our positions such as they are.
One thing we can count on: Wall Street will continue to tout stocks as the way to go for the long run. If there's any kind of correction, then they'll tout "buying the dips." And if there's - heaven forbid - an actual bear market, we'll all hear how we should just hang on to our positions until a new bull market starts again. That "advice," we suspect, will never change.
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