6/4/2013 5:45 PM ET|
12 reasons not to fear market bubble
Investing is never risk-free, of course, but memories of the last crash are causing investors to miss out on the biggest gains in years.
The idea that financial markets will go into another free fall like the one that hit in 2008 has never been entirely left behind by many investors. It's one of the reasons a lot of them missed the current stock rally and stuck with bonds.
Now bonds, too, are being talked about as a risky bubble that will pop as soon as the Federal Reserve hikes interest rates. Meanwhile, in 2013, stocks are seeing the biggest gains in years.
What's an investor supposed to do? It's not exactly "Don't Worry, Be Happy" time. But too much fear can be counterproductive.
Investors should start by reviewing all of those dire warnings. They can't all be true. It's never foolish to keep a dose of healthy skepticism. But it's hard to support the view that financial assets are totally unhinged from the "real" economy.
Here are a dozen reasons why stocks and bonds are not bubbles waiting to burst (along with some reasons analysts and fund managers say there could still be trouble, even if there is no bubble).
1. Crashes don't come when people expect them
Back in August 2008, there was not much talk of stocks being vulnerable. Google Trends shows that the search terms "stock bubble" and "stock crash" fell to the lowest level in the nearly five years the month before the crash. They've risen steadily this year
But search traffic is one thing. Valuations are another. And those could be high. Bond yields are near all-time lows, not even covering the cost of inflation. Stocks are close to their average based on underlying earnings. "The case for a bubble in the bond market is a strong one. The case for a bubble in the stock market is not a strong one," says Hugh Johnson of Hugh Johnson Advisors. "The real question: Can the Fed let the air out of the bond market in a way that bond-market trading remains orderly?"
2. Stocks and bonds rarely, if ever, fall dramatically at the same time
In the 2008 crash, bonds prices soared, helping markets stabilize. The chance of a "double bubble" is highly unlikely. Unless, of course, this time is different. The threat is that stocks are getting all the investor attention simply because there's no other good option.
"Bullish people have been looking at equities in relationship to Treasurys, with their low historical rates. When those go up . . . that narrative falls apart," says James C. Roumell, president and portfolio manager at Roumell Asset Management.
3. Markets have been letting off steam, especially in bond markets where a Fed rate hike is widely anticipated
The key 10-year Treasury note fell 25% in price last month as its yield jumped 50 basis points (half a percentage point). Prices move inverse to yield. But bond investors, not a nimble bunch, may simply be holding on out of necessity or habit. "A lot of people still own bonds because they still think they are safe.
Sometimes because of investment policy for a fund or institution, they can't get out," says Mark Germain, chief executive officer of Beacon Wealth Management.
4. The "panic buying" rallies of past market bubbles have not been seen
Stocks have gained steadily, but not in leaps. The first trading day this year saw a 300-point Dow rally of 2.3% -- still the year's top gain but nowhere in the top 50 one-day percentage gains. But just because it hasn't happened doesn't mean investors have become more rational.
"If the people on the sidelines suddenly jumped into the market, it could hurt a lot. Panic buying would be a bad thing with a market already overvalued about 10%," says David Edwards, president of Heron Financial Group.
5. The fear of a "bond bubble" is based partly on a misconception that people hold massive amounts of highly interest-rate sensitive long bonds
But Treasury data shows that the average debt maturity is just over five years. In recent years, the Fed has been mopping up long bonds, and few have been issued.
That's not to say higher rates won't be tough to navigate. Rate rises would slam wide sectors of the economy, including mortgages. "Fixed-income bonds yields have been low for so long … the mindset is still burned in," says Brian Levitt, chief economist of Oppenheimer Funds. When the Fed finally lifts short-term rates, it will have an impact on a wide range of borrowing costs.
6. The housing market is improving
Housing is a key to stability since it was the cause of the last crash, and its plunge created a perfect storm that froze credit markets and hammered consumer confidence. The bad news is that weak spots remain in real estate. "The housing recovery is not complete," said David Blitzer, chairman of the index committee at S&P Dow Jones Indices when recent home data was announced. Foreclosures remain high, and mortgage rates are going up.
More from U.S. News & World Report:
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7. ETFs include fixed-income offerings that can be "laddered" to produce less volatility
This means it's possible for income investors to diversify yields by using low-fee funds. S&P Capital IQ says there is $250 billion invested in fixed-income ETF funds. Half of the funds S&P covers are less than three years old. Investors have shown strong demand for new offerings like the iSharesBond 2016 Investment Grade Corporate Bond ETF (IBCB), launched in April, and PowerShares Global Select Short Term Bond Portfolio, filed in March.
A less conservative move, but one that could pay off if rates rise, are new funds like the ProShares High Yield-Interest Rate Hedged ETF, which is made up of high-yield, short-term debt mixed with Treasury futures designed to gain value as rates rise. In addition, investors already have put more money into floating-rate bank funds than they did during all of last year, according to Lipper.
8. Stock valuations are near historically normal levels based on earnings
The Fed insists it will not boost rates until a recovery has been confirmed. But there may be room to doubt outsized earnings growth. Corporate sales are not rising.
"It is not often mentioned that companies are benefiting from operating [profit] margins that are near the highest in history," says fund manager Roumell. The recent years of low rates and hiring cutbacks have created easy profits that will not continue. "If you look at it this way, stocks are a lot more expensive," he says.
9. Fund managers have been aggressively buying low duration (short-term) bonds to fill income needs, which will lessen the impact
The funds will attract new buyers with higher yields when rates rise. That might support the market, but it doesn't mean bond fund investors will reap the benefits. In fact, they should beware of sticker shock. Financial Industry Regulatory Authority Chairman Richard Ketchum recently warned financial advisers to "remind clients that bond funds are not the same as directly owning fixed securities -- if the market moves, losses will occur instantaneously and there will be no ability to hold a bond to maturity."
10. Mutual funds that invest in stocks and bonds, like target-date or balanced funds, have reduced exposure to long-term fixed-income debt to soften the impact of rate rises on widely held retirement funds
No downside to caution here.
11. Income investors have shifted into dividend stocks, floating-rate funds and real estate investment trusts, which can raise dividends as interest rates rise and inflation increases, or high-yield bonds that do better in a stronger economy
As investors diversify income holdings, the market is vulnerable to a bond crash.
12. Moderate growth and inflation will help the stock market, and a moderate rise in interest rates will help savers
In "the post-crisis way of thinking," people have been "reluctant to embrace views of modest growth and inflation" even though "it's what we now have," Levitt says. On that front, at least, things may really be better than we think.
More from U.S. News & World Report:
VIDEO ON MSN MONEY
The reasons why to fear a market bubble are the national debt, the still dismal unemployment, millions of homes being held by banks to inflate home prices, the government propaganda of a recovery and the Fed Reserve's spending well over a $trillion plus dollars that don't exist over several years propping up this overvalued market.
That bubble is peaking as creating and flooding Wall Street with too much monopoly money is taking its toll. Buying our own debt with faux money is financial suicide.
Hang on to yer butts cause that loud bang coming will be this Ponzi scheme bursting.
When are the talking heads going to acknowledge the housing recovery isn't what it is portrayed to be. These prices aren't being pushed up by individuals buying up the lions share of houses. This is a market being forced up by the hedge fund sector turning us into a nation of renters. They are now going public with more and more REIT's and shifting the risk to the individual investors while pulling in 6 and 7 digit salaries. Don't worry, the government will end up bailing out this monster of their own design, and just like the big banks, nobody will serve a single day of jail time.
Haven't we been batting this around for over a month now ?
When will the Fed act ?
When the EU gets close to 6.5% !! (we may have a answer Friday)
The fourth paragraph hit every issue on the head; Start reviewing your positions as they might relate to these warnings and make changes accordingly. If you just sit there and fuss about what the Fed is doing, or worry about the EU, Japan, or the many other things without ACTING, then you get tossed to the whims of all those 'forces vying for their slice of the pie'.
Remember: NO FEAR!!
Who pays for this propaganda? It's like Goebbels is back with the Third Reich behind him singing in chorus: "A showering we will go... A showering we will go... Who, hoo, yeah, in the bath we gonna go..."
No bubble? What do you call the last fifteen years?
Just like DEM Barney Frank screaming at O'Reilly that Fannie Mae and Freddie Mac were "just fine" and zero risk weeks before collapse.
The whole article is a joke.
Beware of the cheerleaders trying to blind you.
Whether the financial markets collapses or not I have no idea, honestly the easiest trade there is is taking the opposite side of the masses.
Remember professionals buy the lows and sell very high, ask yourselves to whom in the greatest fool game.
Hey gambling addicts...go ahead...spend juniors college fund...spend that mortgage payment on one last buy in the market...go ahead...its only going to continue to keep going higher...we swear it will...
signed - your friendly neighborhood trade broker fleece artist : )
This advice we get on a day when the DOW is off 200 pts.
I expect it won’t be long before most of the advertisements on Cramer’s Mad Money Show are for either Alzheimer’s treatments or toys. That’s because most of his audience is now either over the age of eighty-five or under the age of six, all of whom watch primarily for the entertainment value of him acting sooo silly.
Which leads us once more to that lingering question about financial advice in the media: “Who gives better guidance, Jim Cramer or Cosmo Kramer?”
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[BRIEFING.COM] The stock market finished the Tuesday session on the defensive after spending the entire day in a steady retreat. The S&P 500 (-0.6%) posted its third consecutive decline, while the small-cap Russell 2000 (-0.9%) slipped behind the broader market during afternoon action.
Equity indices were pressured from the start following some overnight developments that weighed on sentiment. The market tried to overcome the early weakness, but could not stage a sustained rebound, ... More
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