Are Markets Just Dithering?

Are markets just dithering?

"Dithering" means being indecisive. Markets do seem to be dithering, don't they?

Start with Stocks. They're overvalued. But that's not news, right? Despite this, they continue to press up against their all-time highs, occasionally breaking through to set a new all-time record. But then things settle down and not much happens. All of this has been dragging on for what seems an eternity - or at least feels this way.

Then there's the bond market. We always look to the Treasury market first to understand what's going on there. And here we find yields have risen in a some what dramatic fashion. No dithering there. But with the 1-year Treasury having hit the 5% mark, well, there's been a lot of dithering: bit bit over, a bit under.

What about the idea that bonds are in a long-term Bear Market? Shouldn't yields continue higher from here? Well, yes and no. The Yes side of the ledger may play out. But there's not reason to expect a rise in a straight line. Remember "long term" means just that. The long-term Bull Market that began around 1980 lasted over 40 years. The Bear Market that preceded it lasted around 40 years. That's FORTY years.

Yes, that's far longer than many of us can wrap our minds around. It's always been that way when it comes to long-term, at least when it comes to investing. Most folks look at prices today, maybe recent days, and stop there. They make their decisions based on what could hardly be called even a sampling of data. Thus most of us screw up our investments.

Even those of us who contribute religiously to our 401ks and follow the sage advice to put all our eggs into the stock basket - for the long run - are subject to this. Sure, we might have succeeded in building up a nest egg, especially if we've been in the game since 1980 or so, when an arguably spectacular Bull Market in Stock commenced. But if we stop at these last 40 years or so in our historic perspective, we fail to see the long-term Bear that preceded it. That one lasted from roughly 1966 to 1980. That's 14 years. In the course of that time, stocks went nowhere. Worse, since inflation raged during much of that time, a buy and hold strategy saw the value of your stocks decline by half or more in terms of their purchasing power.

Not a good recipe if you retired in 1966.

What about now? Could we be in a similar place now? If you're about to retire from your active earning years, and you've got most of your precious investments in stocks it's worth thinking about, no?

Switch to bonds? That seems to be a popular move out there now. It seems there's some pessimism about stocks, even about the future. So bonds seem a safe bet to some. 

Okay, but what if they stop dithering and yields break out and rise? Some say the current 5% or so for the 10-year treasury - a popular choice for investing in a bond portfolio - is "normal." Indeed it is, looking out over the horizon of history. But normal only exists in the midst of a sea of extremes. If you know what average means, you get this. And you have to wonder: After years of having rates suppressed to zero, with yields that fell alongside the Fed's rate suppression, will there be a reaction where yields fly high above "normal" in order to preserve that average 5% that seems normal to some? And if they do what happens?

Well, the value of your bonds falls. That's not the end of the world if you buy individual bonds and hold them to maturity and just collect the coupon. But what will the value of the bond be when it matures?

And that's the second rub to this bond solution: inflation. If yields are rising, and are doing so because inflation is scaring them up, then your principal takes a hit - maybe a big one. And when it comes time to reinvest when the bonds mature, you'll effectively have a lot less to do that. That $100 you invested today could be worth $50 in ten years.

But, hey, we're not going to go down that rabbit hole. For one thing, none of this should be taken as investment advice. Just noting a bunch of facts. Just saying do some homework and grind the gears a bit with that brain God gave you.

Oh, one last item (how could we forget?!!): Gold. It's been dithering since it hits its all time high early in the year. At that point, down it went. And it's been more or less dithering ever since. 

If you're got some, are you getting antsy? Shouldn't it be rising soon to reconnect with it's Bull Market? And if so, won't that provide some balance, even a solution to dithering stocks and bonds if they choose fall in price after their dithering days are done?

Well, we'll leave it at that for now. After all, the dithering does seem firmly in place - for now.

Just remember, dithering never accomplishes anything, never solves any problem, isn't a place you want to spend the rest of your life, and isn't a place these markets will settle into for the long run.

For now, let's all take this weekend as the gift it ideally is: a time to break from the weekly work grind, maybe a good time to rest, recreate, maybe even noodle over this dithering stuff if indeed it's of concern.

Enjoy!

P.S. - Here's a view from the other side of dithering from the Rolling Stones.