Don’t Think Twice Cause It’s Alright….
Bob Dylan was awarded the Noble Prize for literature this past week. High art and low art patrons debate the merits of how and why a commercial artist should be considered for the prestigious award. It doesn’t have much to do with your money, but art patrons’ contrasting viewpoints are similar to the differences we see with financial market buyers and sellers. An ode to the ‘tambourine man!’ Okay back to your money.
Q3 was hard on most income producing assets like REITs, bonds, telcos, and utilities. It appears markets believe the ‘rates they are a changin’ meaning higher. But we’ve seen this picture before. Short-term price movements often signal false alarms so it’s difficult to know what ‘answer is blowin’ in the wind’ with interest rates. Economic conditions are okay, but not stellar. Rates are still very low historically, and investors keep pushing stock prices higher.
Asset Class Review
100 days after the Brexit scare, and 9 months after the most recent Fed rate hike, stock markets once again confounded the instincts of nervous investors and went up instead of down. Fed Chairperson Janet Yellen told the world that the US economy is healthy enough to weather a rate increase, yet the Fed declined to raise rates. That was reassuring news to the Wall Street traders and investors, helping to provide yet another quarter of positive gains in US stocks.
US returns have been so good for so long that many investors are wondering: why are we bothering with foreign stocks? A recent Forbes column suggested the answer: historically, since 1970, foreign stocks have outperformed domestic stocks almost exactly 50% of the time, meaning the long trend we’ve become accustomed to could reverse itself at any time. Perhaps Q3 was a turning point: international markets mostly outperformed the US, but the developed economies of Asia and Europe still lag for the year.
Economic statistics are weak predictors of the market’s next move. It’s possible that the US and global economy are weaker than they appear, yet the slow, steady growth we’ve experienced since 2008 shows no visible signs of abating. US stocks are priced about 20% higher than their long term average. Still, investors have said ‘don’t think twice, cause it’s all right’ and pay up for stocks with rates low and the economy stable if not strong. If either of these two conditions changes, the path will likely be more volatile than we’ve seen over the past five years.
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